Chapter-1

Introduction

1.1) Origin of the report :

The role of the central bank has grown in importance in the last century. To ensure the
stability of a country's currency, the central bank should be the regulator and authority in
the banking and monetary systems. As a part of our course “Central Banking : Regulations
& Supervision” , we were assigned to submit a report on the topic of “Regulatory and
Supervisory Performance on Bangladesh bank”. Through this report we have
experienced the Recent Stability Initiatives of Bangladesh Bank.
We were assigned to develop this report based on the Initiatives of Bangladesh Bank in
2017.

1.2) Objectives of the report :

The main objective of the report is concentrated on generating idea of Recent Stability
Initiatives of Bangladesh Bank. Overall, this study is to be conducted to fulfill the following
objectives-
i. To generate idea about Regulatory and Supervisory Performance on
Bangladesh bank.
ii. To generate idea about recent Initiatives of Bangladesh Bank.

1.3) Methodology of the report :

We have used mainly secondary data in our paper. The secondary data has been collected
from the bangladesh Bank official website.

1.4) Limitation of the report :

Although, we have tried to complete the report with the best possible way, but we have face
some problems which are-
(a) Time Limitation.
(b) Limited experience.

1
 Chapter -2

Literature Review
2.1 Effective Bank Supervision and Role of Central Bank
It is well known that the supervisory approach and initiatives have been
changed over the years with the expansion of banking activities in an
environment of globalization effort in all economic directions. Financial
regulation and supervision are progressing at an encouraging speed and
concerns about safe and sound banking are widely shared. The perception or
the growing recognition of the dual role of Central Bank or the monetary
policy authority in the forms of ‘price stability’ and ‘financial stability’
offers new impetus in the activities of the Central Bank in supervising
banking system mainly in the developing countries.

2.2 Central Bank is recognized as Bank Supervisor in Most Jurisdictions

In spite of the of the debates on the relative advantages and disadvantages of
the Central Bank being a bank supervisor, the most strongly emphasized
argument in favor of assigning supervisory responsibility to the Central Bank
is that as a bank supervisor, the Central Banks generally have first- hand
knowledge of the condition and performance of banks which is crucial to
identify and respond to the emergence of a systemic problem in a timely
manner. While Central Banks are the supervisory bodies in about 75 percent
of emerging and developing economies, only about 40 percent of advanced
economies have Central Banks as supervisory bodies for commercial banks,
and about 50 percent of advanced economies use a separate bank supervision
agency (Cihak et. al, 2012).

2
2.3 Independence and Adequate Power of the Central Bank might bring better outcome

Effective financial supervision requires strong and independent supervisors,

shielded from day-to-day political pressures by means of a clear mandate,
legal protection, and political support to do their job (Krivoy, undated).
Operational independence, as set out in the Basle core banking principles, is
a complex term, and the nuances that country-specific circumstances may
bring to the subject are as varied as the historical, political, and cultural
realities that come into play (Philip, 2009). Another equally important aspect
is how independent the supervisory agency is in carrying out its dutiesPower
of the Central Bank in connection with effective supervision is connected
with the supervision of government owned and foreign banks. Especially
supervising government owned bank is a crucial challenge of the Central
Bank in a developing country. Government ownership can act to undermine
otherwise effective supervision of banks. A fairly common practice when
banks are government owned is for the government to use them as a vehicle
for financing government-owned or otherwise favored enterprises and
projects. However, to improve the prospects for lasting monetary stability,
Central Banks must work to institutionalize safe and sound banking at all
levels.

2.4 Banking Crises brought Changes in the Standards of Effective

Banking Supervision
Weaknesses in bank supervision came into focus during the most recent
global financial crisis that is believed to be one of the factors leading to the
crisis (Dan, 2010; Merrouche and Neir, 2010; Barth et. al, 2012). The crises
also raised questions on the appropriateness and effectiveness of the
supervisory measures and approaches of the supervisory authority or the
Central Bank that prompted regulators to consider important changes in
regulation and supervision. Globally this also includes various initiatives of
the Basel Committee on Banking Supervision.

2.5 Central Bank has to Coordinate Micro and Macro Prudential Supervision for
3
 Financial Stability
It is basically about interaction between micro- and macro prudential
supervision and its reflection in the design of regulatory institutions. Micro
refers to the bank specific risk whereas the macro is risk affecting all banks.
Micro prudential supervision might be thought of as the management of the
first type of risk, and macro the second. To ensure safety and soundness of
the banking sector, the pursuit of financial stability is a much more subtle
and complex undertaking of a Central Banks which involves not just
quantitative frameworks, but detailed surveillance of risks guided by the
perspective of historical experience. Effective prudential supervision is the
key in this connection.

2.6 Corporate Governance Practices is Crucial for Sound Bank Supervision

Bank supervision is tough in case of weak corporate governance practices
(BIS, 1999). To the extent banks are well-managed, the allocation of capital
occurs efficiently in an economy. If there is poor corporate governance of
banks, bank managers may actually induce firm managers to behave in ways
that favor the interests of bank managers but hurt overall firm performance.
This in turn can hurt the performance of the economy as a whole.

2.7 Central Bank needs adequate Resources and Technology for Effectiveness
Supervisors must be provided with appropriate resources to accomplish their
goals. Meanwhile, modern financial supervision tends to be costly, and
countries must invest in upgrading their supervisory agency in order to have
effective supervision. To begin with, supervisors must know as much as the
bankers do about bank business, financial techniques, risk management, and
market trends. Supervisors must also be able to gather and analyze
meaningful and timely information. Regular on-site supervision conducted
by skilled people following rigorous procedures is especially important, as
supervisors cannot tell if a bank is solvent simply by looking at paper work.
Information system requirements are also expensive because supervisory
agencies must catch up with the industry. Banks in developing countries
usually have state-of-the-art information technology, while Central Banks
and supervisory agencies tend to lag behind (Krivoy, undated).

2.8 Financial Inclusion is Relevant for Financial Stability in Developing Economies

It is becoming increasingly recognized that incorporating fairness into
4
financial sector policy goes hand in hand with the promotion of stability
because financial exclusion carries risks and costs (Caruana, 2012). These
include- risks to financial integrity, given that the cash-based world of the
financially excluded is not transparent; and risks of social, political, and
therefore ultimately financial instability. In recent years, various financial
innovations are promoting financial inclusion and just changing the nature
financial risks in handling financial stability. Advocates of a developmental
role for Central Banks argue that the evolution in the role of Central Bankers
from pure monetary policy and financial stability to a greater role in
propelling and sustaining inclusive economic growth is being driven by
several trends. Many Central Banks in developing economies share this
vision and have already pioneered the adoption of methods to support new
technologies, increase financial literacy and boost financial inclusion (Baer
et. al, 2012).

5
2.9 Some Indicators may Point towards Supervisory Effectiveness
Banking supervisors are expected to demonstrate greater impact of their
actions. It is not easy to find causal relationship between supervisory actions
and visible impacts. However, there are several lessons or indicators from
different global economies that may be used to measure the impact of
supervisory actions (Hilbers et al, 2013). Several challenges cannot be
ignored that could of analytical or legal nature. Analytical challenge is
connected with the fact that the causal relationship between supervisors’
action and impact is not very straight forward; and short term impact might
vary from long term impact. And legal challenges include supervisors face
legal inability to disclose all supervisory actions and interventions;
andsupervisors have resource constraints to measure all impacts and
effectiveness. Most of the indicators on the effectiveness of bank supervision
are connected with financial stability and more specifically safety and
soundness of a banking system: capital adequacy, asset quality, liquidity and
sensitivity to market risk. Consumer protection is another area to target by
the bank supervisors where transparency is a crucial issue to address. There
should be arrangement for handling complaints of the consumers and bank
depositors and clients by the bank supervisory authority. In the context of
developing countries, community reinvestment and financial inclusion are
important indicators on the way to attaining financial stability.

6
-7-
Figure-1: Bangladesh Bank's Departments for Regulation & Supervision with their Functional Areas
(Shaded boxes are recently introduced departments)
Regulation & Supervision

Deposit Insurance BRPD (Banking Regulation DBIs (Departments of DOS (Department of Off- BFIU (Bangladesh
Department & Policy Department) Banking Inspection) site Supervision) Financial Intelligence
Unit)

Main Objectives/ Functions

To protect the depositors Issuance of prudential To conduct different types To supervise the banks on the Establish an effective system
against the loss of their regulations and guidelines of on-site bank inspection basis of submitted financial for prevention of money
deposits in the event of a statements/ reports laundering, combating
bank failure terrorist financing

Major Areas of Operations

 Deposit Insurance  Capital adequacy  Examining the books of  Performance analysis based on  Suspicious transaction
Division requirements accounts CAMELS reports
 Liquidated Bank  Criteria of corporate  Assessing the financial  Monitoring statutory liquidity  Cash transaction reports
Monitoring Division governance condition requirement  Information related to money
 Issuance of banking license  Review of the internal & Monitoring the overall credit, laundering/ financing of
 Issuance of directives for external audit report deposit, investment and liquidity terrorism
compliance  Determining status of position  Exchanging information with
compliance Review of the large loan foreign counterpart to ensure
 Transaction testing portfolio cooperation at international
 Preparation of off-site level
supervision report

-13-
 Figure-2: Bangladesh Bank's Departments for Regulation & Supervision with their
Functional Areas (Shaded boxes are recently introduced departments)

Regulation & Supervision

FEPD (Foreign Exchange ACFID (Agricultural Credit & DFIM (Department of Financial Green Banking and CSR
Policy Department) Financial Inclusion Department) Institutions and Markets) Department

Main Objectives/ Functions

Formulating and implementing Formulating agricultural Regulates and supervises the To develop sustainable
policies related to foreign credit policy for the country Non-Bank Financial banking framework
exchange transection & foreign and its implementation Institutions (NBFIs)
exchange market

Major Areas of Operations/ Major Divisions

 Green Banking wing

 Criteria and conditions for holding  Provides refinance facilities to BKB,  Issuance of license
 Corporate social responsible
and dealing in foreign exchange RAKUB & BRAC against  Formulation of prudential wing
 Guidelines for off-site and on-site Government/ Bank guarantee regulations
 Financial Inclusion wing
supervision of foreign exchange  Monitors the on-going projects  Conducting off-site supervision
transactions  Collects information and maintains  Assessment of financial and
 Supervises and monitors data in respect of agricultural credit managerial soundness of NBFIs
Authorized Dealers through CAMELS rating

-14-
 Figure-3: Bangladesh Bank's Departments for Regulation & Supervision with their
Functional Areas (Shaded boxes are recently introduced departments)
Regulation & Supervision

DFEI (Department of FSD (Financial Integrity FIS (Financial Stability FEOD (Foreign Exchange
Foreign Exchange and customer services Department) Operation Department)
Inspection) Department)

Main Objectives/ Functions

Conduct on-side inspection To conduct on-site Examine the stability of the Ensuring compliance of
on AD braches & money inspection on customers financial system of Bangladesh regulations regarding FX
changers complaints & to formulate through macro-prudential transection & FX transection
the resolution policy analysis reporting

Major Areas of Operations/ Major Divisions

 Comprehensive Inspection on the  Vigilance and Anti-Fraud Division  Monitor international practice and  actions against objections under
Foreign Exchange and Foreign  Customer Services Division innovations nonpayment of bills
Trade related activities  Grievance Redressal Unit  Recommend macro-prudential  Maintaining Database of Overdue
 Comprehensive inspection of Off-  Customer Service Policy Unit regulations Bill of Entry
shore Banking Unit  Dissemination and  Monitor Liquidity positions and credit  Taking actions against PSI objections
 Examine and analyze the media Communication Unit growth  Ensuring repatriation of export
reports  Technical Services Division  Prepare Financial Stability Report proceeds
 To take necessary actions on the  Real time FX transection Reporting
findings through dash-board

-15-
 Figure-4: Supervisory Functions of Bangladesh Bank's Different Departments
(Shaded boxes are recently introduced departments)

On-Site Supervision

DFEI FICSD
(Department (Financial Integrity
DBI 1 DBI 2 DBI 3 DBI 4 of Foreign & Customer
Exchange Service
Inspection) Department)

Inspects all Inspects all Inspects

Inspects all state Inspects all Inspects all Foreign
Domestic owned commercial SME Loan of Issues
Private Islamic Exchange related to
Banks and all Non- all Banks, two Banks, NRB transactions and
Commercial bank Financial Specialised customer
Banks Banks & any issues complains
Institutions Banks & three Foreign related to
(NBFIs), BDBL & Non-scheduled over phone
Banks foreign or written
BASIC Banks exchange

-16-
 Figure-5: Supervisory Functions of Bangladesh Bank's Departments
(Shaded boxes are recently introduced departments)

Off-Site Supervision

Green DOS BFIU (Bangladesh ACFID (Agricultural FEOD (Foreign

Banking & DFIM (Department of FEPD (Foreign
(Department of Financial Exchange Policy Credit & Financial Exchange
CSR Financial Institutions Operation
Off-Site and Markets) Intelligence Unit) Department) Inclusion
Department Supervision) Department) Department)

Performs Establish an Implements * Implements * Rrepatriation

Develop Supervise the supervision by effective system policies related agricultural of exports
sustainable banks on the receving for prevention of to foreign credit policy procides
banking basis of different money exchange for the country
framework * Ensuring entry
submitted financial laundering, operations of and Provides of imported
through financial statements, and combating banks by fixing refinance
effective goods
statements/ reports weekly, financing of criteria and facilities
implementation Reports/ monthly, terrorism by conditions for * Ensuring
of green * Monitors the compliance of
Returns quarterly, semi- monitoring and holding and on-going
banking, CSR annually or taking necessary dealing in all FX
and finanvial projects and transection
annually or on action against foreign exchange Collects
inclusion demand of all Suspicious and supervises reporting
information
NBFIs Transaction and monitors and maintains
Reports, Cash Authorized data
Transaction Dealers’
Reports. activities

-17-
 Chapter -3

Recent Stability Initiatives of Bangladesh Bank

January-March,2017

3.1.1 Composite Financial Stability Index (CFSI)

BB has developed a tool named Composite Financial Stability Index (CFSI) to measure the stability of
the financial system as well as to monitor build-up of any systemic stress in the financial system. It
takes into account the interconnectedness among different sectors of the economy and thus reflects any
stress in the financial sector stemming from other sectors as well. CFSI is a combination of eighteen
different macroeconomic and financial soundness indicators aggregated under three sub-indices-
Banking Soundness Index (BSI), Financial Vulnerability Index (FVI) and Regional Economic Climate
Index (RECI). This index reflects the volatility of the financial system. Excess volatility in any
direction for a prolonged period can be an indication of build-up of systemic risk in the system provided
that other relevant information is taken into consideration during the time of analysing the index.

3.1.2 Rationalisation of Rate of Interest on Deposit and Lending

Observing banks' recent trend of decreasing interest rate on deposit more than the same on lending, BB
advised them to stem the declining trend in deposit rates and urged to reduce the intermediation spread
and to emphasize on recovery of defaulted loans along with different aspects of management efficiency
for maintaining the lower trend of lending rate.

3.1.3 Rationalisation of Schedule of Charges

Analysing the recent trends in schedule of charges, for instance charging of varying/differential
fees/commissions in diverse forms and rates at different stages of loan processing in the Cottage, Micro,
Small and Medium Enterprise (CMSME) sector, BB issued instructions regarding loan application fee,
documentation fee, CIB charge, stamp charge, legal and valuation fee, and early settlement fee for
CMSME sector and prohibited banks to impose any charge/fee/commission other than the ones
mentioned above.

3.1.4 Call Borrowing Limit for Financial Institutions (FIs) -18-

BB decided that the base for setting the upper limit of call borrowing for Financial Institutions (FIs)
would be equity instead of net asset from 01 February 2017 onward. Accordingly, FIs were instructed
to determine their equities based on the balance sheet as of 31st December of each year and allowed to
borrow maximum 30 percent of the calculated equities from the call money market for the next 12
months (i.e. 01 February-31 January). Earlier, FIs were allowed to borrow maximum 15 percent of their
net
assets from the call money market.

3.1.5 Computation of Statutory Liquidity Reserve of FIs

BB replaced section-02 of the FID circular no. 06/2003 regarding computation of Statutory Liquidity
Reserve of FIs. The section was replaced as follows: "For computing the liquidity reserves of FIs, the
eligible components include cash balance (Bangladeshi currency and note), balance maintained with
Bangladesh Bank, balance maintained with other banks/FIs, unencumbered Bangladesh treasury bills
and treasury bonds, and assets approved by notification in Government gazette or by Bangladesh
Bank."
3.1.6 Changes in the Foreign Exchange Regulations

During the review quarter, BB has brought a number of changes in its foreign exchange regulations:

i) To widen the scope of Taka working capital loans for foreign owned/controlled companies, BB
decided that resident persons/ companies may purchase Commercial Papers (CPs) issued by such
companies in terms of general instructions of the Guidelines on Commercial Paper (CP) for Banks
issued vide BRPD Circular No. 07, dated 25 September 2016.

ii) To facilitate foreign exchange transactions, authorized dealers (ADs) were allowed to issue
guarantee, bid bond or performance bond in local currency against taka equivalent back to back foreign
currency guarantee with suitable coverage for exchange rate fluctuation from counter guarantee issuing
banks abroad.

iii) BB clarified that shares may be issued in favor of non-residents by debit to non-resident Taka
accounts maintained by ADs in the names of their overseas branches and correspondents against inward
remittance in convertible foreign currencies. Hence, ADs may issue certificate in support of the
payment
from such account for purchase of shares in Bangladeshi companies.

iv) In order to keep minimum involvement of AD's own fund for settlement of import, ADs maintaining
exporter's retention quota (ERQ) accounts were allowed to transfer fund from their ERQ accounts to
other Ads of same exporters or their subsidiaries/sister concerns for settlement of import payment
subject
to observance of specific terms and conditions stipulated for both the fund transferring and receiving
ADs.

iv) BB enhanced the limit of advance payment by ADs on behalf of exporters from ERQ up to USD
25,000 or its equivalent for bona fide business purposes subject to observance of specific terms and
conditions. Earlier the limit was USD 10,000 or its equivalent.

v) To enhance the scope of business travel abroad by officials of

enterprises located in Export Processing Zones (EPZs) and Economic Zones (EZs), card issuing ADs
were permitted to issue International Debit/Prepaid card up to three (03) top tier
-19-officials of concerned
enterprise against balances held in foreign currency accounts maintained as per Paragraph 31,
Chapter 13 of Guidelines for Foreign Exchange Transactions-2009 (GFET) and FE circular no. 22
dated 09 August 2016. EPZs and Ezs enterprises may avail such card facility from one card issuing
bank
only.

vi) In order to ease short-term borrowing by Type A industries in EPZs/EZs, it was decided that they
may access short-term foreign currency loans from parent companies/shareholders abroad and
other Type A subsidiaries/associates operating in EPZs/EZs. Before transferring the fund as such, ADs
were advised to satisfy themselves that the fund is unencumbered.

vii) To facilitate the remittance on account of registration fee for medical check-up services to migrant
workers, ADs were allowed, upon requests from approved medical centers, to remit the fee to the Bank
Account of the beneficiaries subject to production of invoices specifying details of the check-up by
persons and deduction of applicable taxes.

viii) Besides usual/quarterly payments, LCs/Contracts for import of capital machinery require phase-
wise
payments as part of the total import value, which, in some cases, leads Letter of Credit Authorization
Form (LCAF) to expire before settlement of such remainder payments. To facilitate these remainder
payments, BB decided that ADs may effect such remittances within 30 months of LCAF issuance
against import of capital machinery without obtaining its revalidation. Moreover, revalidation of LCAF
will not be required for remittances against import out of fund held in foreign currency accounts of
importers maintained under general or special authorization from BB.

viii) In order to ease reconversion of unspent Bangladesh Taka into foreign currency by foreign tourists,
any licensed Money Changers (MCs), whether it encashed earlier or not, may reconvert up to USD 500
in cash of the unspent Taka of foreign tourists provided that the tourist submits system generated
encashment certificate provided by any licensed MC.

3.1.7Refinance Scheme for Green Products/Initiatives

To facilitate private sector credit flow into environment friendly products/ initiatives, BB issued a
consolidated guidelines on Refinance Scheme for Green Products/Initiatives. The guideline lists 51
green products/initiatives under 8 sectors eligible for the refinance scheme. It features different aspects
of the
refinance scheme including interest rate applicable for Participatory Financial Institution (PFI) and
customers, calculation of duration of loan repayment and interest rate, eligibility criteria, application
procedure, recovery procedure, utilization of refinanced loan and other relevant issues.

3.1.8 Guidelines on Environmental & Social Risk Management (ESRM) for Banks
and Financial Institutions

In order to broaden the scope of Guidelines on Environmental Risk Management (ERM) issued vide
BRPD circular no. 01 dated 30 January 2011, BB issued the 'Guidelines on Environmental & Social
Risk Management (ESRM) for Banks and Financial Institutions in Bangladesh' by incorporating Social
Risks and expanding risk rating system. This guideline includes typical Environmental and Social
(E&S) Risks for banks and FIs in Bangladesh, risks associated with E&S Risks in credit management,
applicability of the guidelines, applicable standards and other relevant issues.

3.1.9 Amendment to Guidelines form Customer Services and Complaint

Management

BB amended section no. 2.09.01 of the Guidelines for Customer Services and Complaint Management
issued vide FICSD circular no. 01 dated 13 July 2014. The amendment comprises -20-instructions
governing the change in interest rates for term loans with variable interest rates, early settlement fee for
continuous or demand loans and late fee/penal rate/compensation imposed for late payment of
installation of term loans. Besides, banks were advised not to accept blank cheques as collateral against
loans due to recent rise in fraudulent activities involving MICR cheques.

3.1.10 Instructions Regarding Mobile Financial Services Operation

To prevent misuse of and to maintain discipline in the Mobile FinancialServices (MFS), BB instructed
MFS providers to close all accounts of a customer except one if the customer had more than one
account. The transaction limits for individual accounts of MFS were also revised.Besides, BB advised
MFS providers to keep record of cash-in or cash-out amounting to BDT 5,000 and beyond.

3.1.11 Issuance of Uniform Account Opening Form & KYC Profile Form

In the context of various legal amendments and changes in international standards regarding antimoney
laundering activities, BB issued updated "Uniform Account Opening Form & Know Your Customer
(KYC) Profile Form". Banks were advised to introduce the updated forms within 01 April 2017.
 Recent Stability Initiatives of Bangladesh Bank
Aprl-June,2017

3.2.1 Guidelines on Credit Card Operations of Banks

Considering the necessity of improving the electronic payment systems and the growth of domestic
credit card operations, BB issued guidelines on credit card operations of banks to ensure safe,
secure and efficient operations of credit cards as a payment instrument. The guidelines include an
overview of credit card operations and instructions regarding credit limit and settlement, marketing,
eligibility criteria, issuance of principal, supplementary and corporate credit cards, terms and
conditions, billing process, collection/recovery mechanism, protection of customer rights, dispute
resolution, internal control and compliance, fraud control and security of credit cards, and other
legal and regulatory issues.

3.2.2 Prudential Guidelines for Consumer Financing

Taking into account the increasing demand for consumer goods, BB revised regulations for credit
cards (regulation 13) ) and regulations for personal loans including loans for the purchase of consumer
durables (regulation 30) of ³Prudential Guidelines for Consumer Financing´ [BRPD Circular No.
04/2017]. The amended regulation for cards states that maximum limit for unsecured loans and
secured loans (against liquid securities) under credit card shall not exceed BDT 10 lac and 25 lac
respectively. Similarly, revised regulation for personal loans including loans for the purchase of
consumer durables sets limit per person for personal loans at BDT 5 lac without any securities while
the amount shall not exceed BDT 20 lac for loans secured against collaterals.

3.2.3 Investment in Bonds/Debentures

-21-
In the light of freshly added section 26(ka) of Bank Company (Amendment) Act, 2013, BB
instructed banks to invest no more than 5 percent of their total amount of paid-up capital, share
premium, statutory reserves and retained earnings in the bonds/debentures of another
company. The circular also includes instruction regarding approval of the bonds/debentures by
Bangladesh Securities and Exchange Commission (BSEC), External Credit Rating of the issuing
company and single borrower exposure limit of the investing bank, among other relevant issues.

3.2.4 Prudential Guidelines for Small Enterprise Financing

Due to increasing legal complexities arising from post dated/undated cheques collected as
collateral against loans, BB abolished the relevant regulation (regulation no. 6(e)) from the
Prudential Guidelines for Small Enterprise Financing. Accordingly, BB issued an instruction
regulation through BPRD Circular 08/2017 in which banks had been advised to collect a letter of
authority from the clients for debiting their accounts for repayment of loan installment(s) as per
loan agreement, a memorandum of deposit of Cheque, and fully prepared and valid signed post
dated cheques for each installment stipulating amount and date as per repayment schedule.

3.2.5 Re-fixation of Interest Rate on Agricultural and Rural Credit

With the aim to increase the credit flow in the agriculture sector, BB decreased the upper
limit of the interest rate on agricultural and rural credit from 10 percent to 9 percent.

3.2.6 Changes in the Foreign Exchange Regulations

During the review quarter, BB has brought a number of changes in its
foreign exchange regulations that are stated below:

i. BB increased the maximum limit that authorized dealers (AD) would be allowed to remit
abroad on behalf of IT/software firms to meet their bona fide expenses from USD 25,000 to USD
30,000 in a calendar year. BB also clarified that this facility is not linked with exporter's retention quota
(ERQ) account and is remittable through wire transfer and/or international card within the limit.

ii) To promote export of ICT services, BB permitted service exporters to retain 70 percent of their
repatriated export receipts in ERQ accounts. Earlier it was 60 percent.
iii) BB accorded general approval in favour of individuals and institutions resident in Bangladesh for
purchase of Taka bonds issued with permission of Bangladesh Securities and Exchange Commission
(BSEC) by foreign owned/controlled companies in Bangladesh.

iv) In order to widen the scope for repatriation of ICT related payments, ADs were allowed to provide
facilities to credit inward remittances received in international card number/account against the
services provided by individual developers/freelancers. In this context, ADs shall issue to
individual developers/freelancers international cards (termed as µFreelancer Card¶) having dual
currency units with features of being prepaid from abroad. Mentionable that the stated inward
receipt exceeding USD 10,000 or equivalent is subject to declaration in Form-C (ICT).

v. BB issued a new circular regarding foreign exchange transactions -22-

by the enterprises of
Economic Zones (EZs) in Bangladesh, replacing FE Circular No. 22/2016 which discusses
category of enterprises of EZs and provides instructions about foreign investment in EZs,
maintaining Foreign Currency (FC) accounts and Taka accounts by enterprises of EZs,
export/selling of goods from EZs, selling of Bangladeshi goods or raw materials or non-
physical contents to enterprises of EZs, import by enterprises of EZs, credit facilities,
repatriation of dividend/disinvestment proceeds to non-resident shareholders, repatriation of
royalty, technical know-how and technical assistance fees, working in EZs by foreign nationals
and reporting thereof.

vi) ADs were allowed to release foreign exchange for study of Bangladeshi students in
permissible courses abroad in favour of the designated intermediary payment processing entity
provided it is clearly mentioned in the admission documents of the concerned main educational
institution that fees, charges etc. are to be remitted through the said entity.

vii) To improve remittance services for the non-resident Bangladeshis (NRBs), BB advised banks to
set up remittance help desk in branches involved in remittance services, to provide remittance
related information to the beneficiaries on priority basis, to arrange separate complain registers for
NRBs/their beneficiaries and to promote all types of investment opportunities for NRBs and the
advantages of remitting money through legal channels.

3.2.7 Permission of New Financial Institution

BB granted permission to one new financial institution named 'Alliance Leasing and Finance
Company Limited' on 06 June 2017 under section 4(1) of the Financial Institutions Act, 1993.

3.2.8 Usage of Electronic Interbank Payment System

To ensure maximum usage of electronic interbank payment systems, specially Electronic Fund
Transfer (EFT) and Real Time Gross Settlement (RTGS) systems, BB instructed scheduled banks
to take necessary steps to provide origination service for EFT and RTGS transactions from all of
their branches within 31 December 2017. Besides, BB advised banks to promote these services
among the stakeholders and to arrange training/workshop and awareness programs for banks'
employees and customers respectively.

3.2.9 Redefining Cottage, Micro, Small and Medium Enterprises (CMSME)

During the review quarter, BB revised the definitions and credit limits of CMSME in
manufacturing and service sector, and of Micro and Small enterprises in trading sector in
line with the National Industrial Policy
2016. BB also clarified that excluding Micro and Small enterprises, other enterprises in the
trading sector would not be considered for the purpose of SME financing.

3.2.10 Revision of CMSME Credit Disbursement Target

In order to secure the desired level of CMSME credit in the overall credit portfolio, BB instructed
banks and FIs to disburse at least 20 percent of total loan portfolio to CMSME in 2017 and to increase it
gradually to 25 percent by 2021. Moreover, to improve the sector-wise distribution of CMSME
loan portfolio, BB urged banks and FIs to disburse at least 50 percent of overall CMSME credit to
Cottage, Micro and Small enterprises and minimum 10 percent of total CMSME loan to women
entrepreneurs. Banks and FIs were advised to increase the share of manufacturing,
-23- service and
trading sector to minimum 40, 25 and maximum 35 percent of CMSME loan portfolio by 2021.

3.2.11 Revision of Interest Rate on Lending to Women Entrepreneurs

To motivate women entrepreneurs in business and productive investment activities, BB instructed
banks and FIs to limit their interest rates on lending at 9 percent for financing women led enterprises
under 'Small Enterprise Refinance Scheme', 'Refinance Scheme for Setting-up Agro-based Product
Processing Industries in Rural Area' and 'Refinance Scheme for New Entrepreneurs in Cottage, Micro
and Small sectors'. Earlier the maximum lending rate was 10 percent.
 Recent Stability Initiatives of Bangladesh Bank
July-September,2017

3.3.1 Prudential Guidelines for Agent Banking Operation

As the demand and importance of agent banking have increased widely over time, BB took initiative to
update and combine the existing policies in this regard to ensure sound and disciplined expansion of this
service. Accordingly, BB issued 'Prudential Guidelines for Agent Banking Operation in Bangladesh', which
contains guidelines with regard to approval process of agent banking operation, agency contract and
permissible activities, responsibilities of bank, assessment of agent, agent operations, technology for
settlement of transactions, AML/CFT requirement, measures for customer protection, reporting requirements
and supervisory oversight, among other relevant issues.

3.3.2 Loan Classification and Provisioning

i) With a view to encouraging participation of the banks in disbursing agricultural and micro-credits, BB
decided that banks would maintain general provision of 1 percent instead of 2.5 percent against all
unclassified short term agricultural and micro-credits.

ii) Considering the cost of operation of the credit card business, BB revised the requirement of maintaining
general provision against unclassified credit card loans from 5 percent to 2 percent to promote cashless
secured transaction.

3.3.3 Amendment of Guidelines on Credit Card Operations of Banks

To mitigate some practical and technical problems encountered by banks, BB amended few sections of the
'Guidelines on Credit Card Operations of Banks' issued on 11 May 2017. The amended sections are
10(C), 12(C), 13(f), 14(d), 18(e) and 19(a) regarding issuance of supplementary credit cards, interest/profit
rates, billing process, collection/recovery mechanism, fraud control and security of credit cards, respectively.
However, the guidelines would come into effect from 01 January 2018.

3.3.4 Foreign Direct Investment Promotion Project (FDIPP)

Under the Foreign Direct Investment Promotion Project sponsored by Japan International Cooperation
Agency (JICA), a Two-Step Loan (TSL) fund amounting to Japanese Yen 7,033 million will be disbursed
through BB with the aim of promoting private sector investment in Bangladesh and -24-
FDI from Japan. Under
this fund, the Participating Financial Institutions (PFIs) will be provided with refinance or pre-finance for on
lending loan to
Japanese-invested enterprises and Bangladeshi enterprises in business relationship with Japanese
enterprises
supporting their operations mainly in manufacturing sector for short to long term duration. In this regard, BB
developed and issued an Operating Guidelines (OG) comprising policies and procedures to operate the TSL
fund. This OG outlines the TSL component of the project, its management structure and governing
agreement, eligibility of end-borrowers and sub-projects, financing scheme, issues relating to sub-loan by
PFIs, on-lending
loan by FDIPP-implementation unit, debt servicing, rescheduling and event of default, fund management,
monitoring and reporting requirements.

3.3.5 Help Desk to Assist Foreign Investors

To boost foreign direct investment (FDI) and to facilitate potential investors to make productive investment in
Bangladesh, BB advised banks to set up at least one dedicated FDI help desk comprising of competent
officials in their Head Offices and/or main branches of Authorized Dealers (ADs) in Dhaka and Chittagong.
BB also circulated an indicative terms of reference for the FDI help desk.

3.3.6 Changes in the Foreign Exchange Regulations

During the review quarter, BB has brought a number of changes in its foreign exchange regulations that are
stated below:

i) To bring uniformity in regulationsbetween the enterprises of Export Processing Zones (EPZs) and
Economic
Zones (EZs), BB decided that equity from foreign shareholders and authorized loan received in foreign
currency from external sources may be credited in Foreign Currency (FC) accounts of 'Type A' and 'Type B'
enterprises of EPZs. BB also allowed 'Type C' enterprises of EPZs to convert their local equity or authorized
loan received in local currency into foreign exchange to settle obligations for importing capital machinery.
'Type B' enterprises of EPZs were also allowed to avail this opportunity if equity or authorized foreign loan
received from abroad falls short to meet such obligations. Besides, instructions nregarding repayment of
Taka loans along with interest shall remain unchanged.

ii) In order to enhance housing finance facility to non-resident Bangladeshis (NRBs) working abroad, BB
decided to provide this facility at a maximum debt equity ratio of 75:25 instead of the existing ratio of 50:50.

iii) To facilitate admission and study abroad by Bangladesh nationals, ADs were allowed to release foreign
exchange on account of Health Coverage/Health Insurance/Medical Insurance fee provided that such fees
are mandatory for Visa/Admission in permissible courses supported by documentary evidence (I-20,
Admission Acceptance Letter, Offer Letter etc.) from the concerned educational institution.

iv) In order to encourage ADs to use the loan under the Green Transformation Fund, BB reduced the interest
rate against this loan to be charged to Ads to six-month USD LIBOR plus 1.00 percent from the existing six-
month USD LIBOR plus 2.25 percent. BB also allowed ADs to determine their own loan interest rates to the
borrowers covering their cost of borrowing from the fund and operational expenses, plus
a reasonable risk-adjusted spread and profit margin.

v) To facilitate short term import finance, BB decided that ADs may, on behalf of industrial importers, issue
repayment bank guarantees without getting BB approval favouring International Islamic Trade Finance
Corporation extending buyer's credit up to 180 days for import of industrial raw materials for own use by
importers, on sight basis, subject to adherence to all applicable credit norms and prudential parameters
including single borrower exposure limit.

3.3.7 Promotion of cashless transaction

To ensure security, minimize transaction risks and enhance public awareness in card-based payments
through different payment channels, BB updated and combined the previously issued instructions in this
regard. Subsequently, BB issued a circular concerning safety, security and promotion of card-based
transactions and different payment channels such as ATM, POS and online/internet/e-payment gateway.
Besides, banks were instructed to strengthen their cyber security, and arrange necessary training and
awareness programs on the same for their employees.

3.3.8 Issuance of Agricultural & Rural Credit Policy & Program for the FY 2017-18
-25-
During the review quarter, BB announced its agricultural & rural credit policy and program for the financial
year (FY) 2017-18. The disbursement target for banks was set at BDT 20,400 crore which is 16.2 percent
higher than that of the previous FY. The credit policy and program provides a highlight of banks' credit
disbursement in agricultural and rural sector in FY 2016-17, describes briefly the features of this program,
and delineates activities regarding credit disbursement, monitoring, recovery, use of information technology,
awareness and training, among other topics.

3.3.9 Instructions for Prevention of Money Laundering, Terrorist Financing and Proliferation
Financing

In order to prevent money laundering, terrorist financing and proliferation financing, BB issued instructions
forscheduled banks and institutions engaged in mobile financial services through two separate circulars. In
general, both circulars include instructions regarding compliance framework, customer acceptance policy,
know your customer (KYC), customer due diligence (CDD), new service or technology, transaction
monitoring, Suspicious Transaction Report (STR), prevention of financing of terrorism and financing of
proliferation of weapons of mass destruction, recruitment and training of employees, and record keeping.
Besides, scheduled banks were provided specific instructions regarding correspondent banking, agent
banking, overseas bank branches and subsidiaries, self assessment and independent testing of bank
branches,
domestic and cross-border wire transfer. Moreover, specific instructions were given to mobile financial
services providers for recruitment of agents and distributors, and monitoring of their activities.
3.3.10 Issuance of Uniform KYC Profile Form for Insurance Companies

To encounter the risk of money laundering and terrorist financing, uniform KYC profile form was issued for
both life and non-life insurance companies/corporations, which would come into effect from 01 January 2018.

Recent Stability Initiatives of Bangladesh Bank

October-December,2017

3.4.1 Amendment in Guidelines of Islamic Refinance Fund

A fund titled Islamic Refinance Fund Account was created at BB through BRPD circular no. 13, dated
18 September 2014, to utilize the excess reserves of the Islamic banks and Fis maintained with BB for
refinancing the agro-processors, small enterprises, renewable energy sector and environment-friendly
ventures. Now, BB amended Section-2(a), 2(b) and 5(a) of the operating guidelines of the stated fund.
Both the tenure of renewable investment in the fund and the tenure of available refinancing were
increased from 3 months to 1 year. Also, refinancing facility availed from BB shall be repayable at the
end of each year instead of each quarter along with quarterly profit and it can be rolled over on yearly
basis (instead of quarterly basis) up to the tenure of the original financing.

3.4.2 Small and Medium Sized Enterprise Development Project

With a view to developing cottage, micro, small and medium sized enterprise (CMSME) sector, a
refinance fund worth USD 240 million was established at BB. Participating banks and FIs which will
finance CMSME will be provided refinance facility from this fund. BB issued a guideline in this regard
which includes instructions on selection of eligible projects/businesses, selection of eligible banks and
FIs, interest rate, collection process and other relevant directions.

3.4.3 Changes in the Foreign Exchange Regulations

During the review quarter, BB has brought a number of changes in its foreign exchange regulations that
arestated below:

i) Surplus earnings of foreign shipping lines working in Bangladesh/their agents are remittable without
prior approval of BB. Earlier, only freight charges collected in Bangladesh were-26-
considered as source of
fund for calculating remittable surplus. Now, it has been decided that the legitimate charges (charges of
demurrage, detention, handling or equivalent charges) in addition to freightcollectable in Bangladesh
shall be considered as sources of fund for calculating remittable surplus of foreign shipping lines/their
agents
subject to deduction of applicable taxes and commission. Accordingly, Form Shipping-I has also been
amended to bring transparency in transaction.

ii) To facilitate the repatriation of remittances against small value service exports in non-physical form
through Online Payment Gateway Service Providers (OPGSP), BB issued FE circular no. 15, dated 07
August 2011 and subsequent circulars for further instructions/revisions of earlier ones. Now, to bring
ease in operations of transactions through OPGSP, BB consolidated all the previous instructions and
included the necessary modifications at one place and issued a master circular in this regard. It covers
issues regarding ADs' standing arrangement with OPGSP, Nostro collection account, limit of export
value for this facility, due diligence by ADs, and reporting requirements, among other relevant issues.

iii) To bring ease in operations of Export Development Fund (EDF), BB issued a master circular
consolidating all the previous circulars and including the relevant modifications. This revised master
circular includes instructions relating to EDF and its objective, interest rate on borrowings from EDF,
tenor of EDF loans, eligibility for EDF loans, amounts of EDF loans, and procedure of application for
EDF loans from BB.

iv) Considering the prevailing interest rate in the international market, BB revised the prevailing
interest rate applied for Participating Financial Institutions (PFIs) that availed Long Term Financing
Facility (LTFF) under Financial Sector Support Project (FSSP). BB decided that an indicative
pricing range of six-month USD LIBOR + 2.0 ~ 3.0 percent would be applicable to the PFIs based on
their CAMELS Ratings. The revised rate came into immediate effect for all existing and future loans of
LTFF.

v) In order to widen the scope of the Green Transformation Fund (GTF), BB decided to include export-
oriented jute product manufacturing sector in the on-lending/refinancing facilities to facilitate their
import of capital machinery and accessories for green/environment friendly initiatives.

vi) BB took initiatives to bring foreign exchange regulations regarding outward remittances of royalty,
technical knowhow or technical assistance fees, operational service fees, marketing commission etc. in
conformity with Section 18 of Bangladesh Investment Development Authority (BIDA) Act, 2016.
Accordingly, private sector industrial enterprises, as defined in Section 15(3) of the Act, shall have
approval from BIDA for such remittances. On receipt of applications together withapproval from
BIDA, ADs shall satisfy themselves of the eligibility of the enterprises, deduction of all applicable
taxes payable and genuineness of the relevant documents. In accordance with the above decision,
paragraph 25 and 26 of Chapter 10 and App-5/59 of the Guidelines for Foreign Exchange Transactions
(GFET) 2009, Vol-1
shall stand repealed.

vii) BB decided that Letter of CreditAuthorization Forms (LCAFs) issued for the import of spare parts
shall remain valid for remittances for 30 months following the month of issuance. Besides, ADs may
also open LCs on behalf of industrial units to import necessary spare parts of capital machineries for
own industrial use up to 360 days usance basis. It was also decided that for such deferred payment
imports, the prices must be internationally competitive and all in cost including usance interest must not
exceed 6 percent per annum.

3.4.4 Agricultural and Rural Credit Disbursement by Private Commercial and

Foreign Banks
To strengthen food security and the base of domestic economy, BB consolidated all previous
instructions
with necessary modifications/inclusions regarding determination of target for disbursement of
agricultural -27-
and rural credit and its implementationfor all private commercial and foreign banks. These new
instructions include determination of disbursement target for all private commercial and foreign
banks, punitive measures if a bank fails to achieve the target and other relevant matters.

3.4.5 Instructions regarding Mobile Financial Services Operation

With a view to preventing abuse of mobile financial services (MFS) and to ensuring discipline, BB
decided that an MFS customer can maintain a balance of BDT 0.3 million at maximum in his/her
individual mobile account from 01 January 2018 onwards. MFS providers were instructed to bring
down the balance of any individual mobile account in excess of the stated limit within the same by 31
December 2017.

3.4.6 Instructions to Increase Remittance Flow

In order to boost the inflow of foreign remittance, BB advised the scheduled banks to consider the
allocation of expenditures of training conducted under various training and development program to
develop the efficiency of wage earners and opening and maintenance of wage earners' bank accounts
under their Corporate Social Responsibility (CSR) initiatives. Banks were instructed to show such
expenses under the applicable sub-sector of 'Social Projects/Community Investment' Sector in the
format
provided through GBCSRD circular letter no 06 dated 10 June 2015.
 Chapter - 4

Recommenations
1.Having a set of prudent regulatory measures, effective supervision depends
upon adequate power, sufficient resources and independence.
2.Central Bank needs strong support from the government to enforce its
authority and supervisory power.
3. Bangladesh Bank needs enough supervisory grips over the state owned
commercial banks.
4.The Central Bank must have adequate authority and power to have control
on the entire banking system.

Conclusion
It is evident that notable changes have taken place in the regulatory and
supervisory arrangement of Bangladesh Bank in recent years. Examination of
the relevant indicators also point to the positive impact of the supervisory
initiatives by the Central Bank. The ongoing efforts of reforms and capacity
development in Bangladesh Bank is contributing for creating a prudential
framework under which banks’ activities could be under continuous monitoring
with an ultimate objective of ensuring a sound banking system that offer
efficient financial services to all classes of people of the country.
-28- However,
ultimate goal can only be achieved only when these positive steps are
complemented by adequate powers, supportive initiatives from bank
management and boards, and favorable approach from government. Pointing
fingers to the ‘supervisory failure’ is not very uncommon in response to the
identification of any occurrence of fund misappropriation or increase in the
non-performing loans in the banking sector of Bangladesh. It is well-
recognized that bank supervisor or Central Bank can play a remarkable role in
preventing banking irregularities; and no one can deny the role and
responsibility of the Central Bank for ensuring safety and soundness of banks.
However, it must not be that straight forward. No degree of supervision can
prevent the irregularities altogether- it can reduce the probability only. This is
because of the inherent nature of supervision where a time lag always exists
before any irregularity can be observed by the supervisory authority. In most
cases when an irregularity is identified by a supervisory authority then it
becomes too late to prevent that. Steps can only be undertaken for preventing
future incidences. That makes the internal control system the most effective
mechanism to prevent any sorts of banking irregularities. It is for that reason a
strong internal control culture is recognized as the best defense against any
unscrupulous transaction in the banking operation. The concurrent nature of
internal audit makes it possible for the bank to detect irregularities at an early
stage.

-29-
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-31-