Chapter-7
Regulation, Performance and Supervision of NBFIs
7.1 Non-Bank Financial Institutions Table 7.1 Trends in Structure of NBFIs
2012 2013 2014 2015 2016 2017 2018*
(NBFIs), have been playing a crucial role by
No. of NBFIs 31 31 31 32 33 34 34
providing additional financial services that is not Government-owned 2 3 3 3 3 3 3
usually provided by the banks. The NBFIs, with Joint-venture 8 10 10 10 11 12 12
Private 20 18 18 18 19 19 19
more multifaceted products and services have New branches 8 7 20 15 14 30 8
taken their place in the competitive financial Total branches 168 175 195 210 224 254 262
* As of 30 June 2018.
market to satisfy the changing demands of the Source: Department of Financial Institutions and Markets, BB.
customers. NBFIs also play an important role
in the capital market as well as in real estate or more. They are not covered under the
sector of the country. Like the banks, most Deposit Insurance Scheme by the Bangladesh
of the NBFIs have separate subsidiaries to Bank. In addition, they are not allowed to deal in
operate merchant banking activities. NBFIs gold and foreign exchange. Nonetheless, they
are supervised by Bangladesh Bank under a may obtain foreign currency loan from abroad
risk-based supervisory system. NBFIs showed subject to prior approval of the Bangladesh
strong performance in terms of growth in assets Bank. NBFIs are subject to the prudential
and deposits during FY18. guidelines/ limits such as income recognition,
asset classification and provisioning norms;
7.2 The authority of granting licenses
capital adequacy norms; single and group
to NBFIs and their control are vested in
borrower exposure limits; prudential limits on
Bangladesh Bank by the Financial Institutions
capital market exposures; classification and
Act, 1993. As per the Financial Institutions
valuation norms for the investment portfolio;
Regulation, 1994 issued by Bangladesh Bank,
CRR/ SLR requirements; accounting and
the minimum paid up capital requirement for
disclosure norms and supervisory reporting
establishing a financial institution is BDT 1.0
requirements issued by Bangladesh Bank.
billion. However, NBFIs’ business line is narrow
in comparison with banks. NBFIs cannot 7.3 Presently there are 34 NBFIs operating
accept any such deposit as is repayable on in Bangladesh. Among these, 3 are government
demand through cheque, draft, or on order of owned, 12 are joint ventures with foreign
the depositor. Therefore, they cannot provide participation, and the rest 19 are locally private
operating account facilities like savings and owned companies. The branch network of
current deposits, cash credits, overdrafts, NBFIs increased to 262 as on 30 June 2018.
etc. NBFIs may access public funds, either Among the branches, 92 are set up in the
directly or indirectly through public deposits, district of Dhaka and the rest 170 are located in
commercial papers (CPs), debentures, and 34 districts across the country. The ownership
bank finance. However, they can only take term structure of the NBFIs and their branch
deposits with a minimum maturity of 3 months expansion related data are shown in Table 7.1.
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Chapter-7 Regulation, Performance and Supervision of NBFIs
Assets Table 7.2 Trends in Assets, Liabilities and
Deposits of NBFIs
7.4 The asset of NBFIs increased (billion BDT)
substantially by 17.82 percent to BDT 841.07 2012 2013 2014 2015 2016 2017 2018*
billion in December 2017 which was BDT Total assets 333.9 436.3 520.1 611.0 713.9 841.07 870.30
Total liabilities 274.3 350.4 424.2 509.0 606.46 725.95 762.04
713.87 billion in December 2016. At the end of
Liabilities-assets ratio 82.2 80.3 81.5 83.3 84.95 86.36 87.56
June 2018, total assets of NBFIs increased to Total deposit 145.4 198.3 238.5 318.1 382.43 467.98 480.10
BDT 870.30 billion (Table 7.2 and Chart 7.1). Deposit as % of total 53.0 56.6 56.2 62.5 63.1 64.41 63.00
liabilities
Investment * As of 30 June 2018.
Source: Department of Financial Institutions and Markets, BB.
7.5 NBFIs are investing in different sectors
of the economy, but their investments are mostly Chart 7.1 Trends in Assets, Liabilities
concentrated in industrial sector. Among the and their Ratios of NBFIs
total investment made by NBFIs 44.2 percent 1000 90
88
was in industry sector, 18.18 percent in real 800
86
In billion BDT
estate, 15.87 percent in trade and commerce,
In percent
600 84
3.81 percent in merchant banking, 2.91 percent 400 82
in agriculture, 1.95 percent in margin loan and 80
200
remaining 13.08 percent was in other sector at 78
0 76
end of June 2018 (Chart 7.2). 2011 2012 2013 2014 2015 2016 2017 2018*
Total assets Total liabilities
7.6 NBFIs are allowed to invest in the Liabilities-assets ratio
capital market up to 25 percent of their paid * As of 30 June 2018.
Source: Department of Financial Institutions and Markets, BB.
up capital and reserve as per section 16 of
Financial Institutions Act, 1993. In December Chart 7.2 Investment Pattern of NBFIs
2017, all NBFIs' total investment in capital (as of 30 June 2018)
market was BDT 21.26 billion which was BDT Others
13.1%
20.55 billion in December 2016. Investment Agriculture
2.9%
in capital market accounted for 2.53 percent Merchant Industry
banking 44.2%
of the total assets of all NBFIs. As of 30 June 3.8%
2018, NBFIs total investment in capital market
Trade and
stood at BDT 18.56 billion. commerce
15.9%
Margin
Deposits loan
2.0% Real estate
18.2%
7.7 Total deposits of the NBFIs increased
Source: Department of Financial Institutions and Markets, BB.
to BDT 467.98 billion (64.41 percent of total
liabilities) in December 2017 from BDT 382.43
Other Liabilities and Equity
billion (63.05 percent of total liabilities) in
December 2016 showing an overall growth of 7.8 Total liability of the industry increased
22.37 percent. At the end of June 2018, total to BDT 725.95 billion in December 2017
deposit of NBFIs increased to BDT 480.1 billion from BDT 606.46 billion in December 2016
(Table 7.2 and Chart 7.1). while equity increased to BDT 115.12 billion
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Regulation, Performance and Supervision of NBFIs Chapter-7
compared with BDT 107.44 billion during the Table 7.3 Trends in Total Loan/Lease and
same period showing an overall increase in Classified Loan/Lease
(In billion BDT)
liability by 19.7 percent and equity by 7.15 2012 2013 2014 2015 2016 2017 2018
percent. At the end of June 2018, total liability Loan/lease 252.1 273.6 372.8 448.5 530.7 580.4 641.9
Classified loan/lease 13.7 16.8 19.7 40.0 38.7 52.1 59.2
and equity increased to BDT 762.04 billion and
Classified loan/ lease 5.4 6.1 5.3 8.92 7.29 8.97 9.22
BDT 108.26 billion respectively. as % of total
* As of 30 June 2018.
Bond and Securitisation Activity Source: Department of Financial Institutions and Markets, BB.
7.9 NBFIs play a significant role for the
Chart 7.3 Trends in NBFIs’ Total, Classified
development of bond market through issuing Loan/Lease and their Ratios
different types of Bonds. By taking NOC from 700 10
9
the Department of Financial Institutions and 600
8
500
Markets (DFIM) of BB, six instruments have 7
In billion BDT
400 6
In percent
been floated in the market up to June, 2018. 300
5
4
200 3
Performance and Rating of NBFIs 2
100
1
7.10 Like banks, the performance of NBFIs 0 0
2011 2012 2013 2014 2015 2016 2017 2018*
is also evaluated through the CAMELS rating Loan/lease
which involves analysis and evaluation of the Classified loan/lease
Classified loan/ lease as % of total loan/lease
six crucial dimensions. The six indicators used *As of 30 June 2018.
Source: Department of Financial Institutions and Markets, BB.
in the rating system are capital adequacy, asset
quality, management efficiency, earnings, 2018, the NPL for NBFIs was 9.22 percent. In
liquidity and sensitivity to market risk. the total asset composition of all NBFIs, the
concentration of loans, lease and advances
Capital Adequacy
was 74.34 percent. The trends of the ratio of
7.11 Capital adequacy focuses on the gross non-performing loan/lease to total loan/
total position of NBFIs’ capital and protects lease is presented in Table 7.3 and Chart 7.3.
the depositors from the potential shocks of
losses that a FI might incur. It helps absorb Management Efficiency
major financial risks related to credit, market, 7.13 Sound management is the most
interest rate, etc. NBFIs in Bangladesh have important prerequisite for the growth of any FI.
been instructed under the Basel III Accord to The total expenditure to total income, operating
maintain Capital Adequacy Ratio (CAR) of not expenses to total expenses, earnings and
less than 10.0 percent with at least 5.0 percent operating expenses per employee and interest
in core capital. rate spread are generally used to understand
Asset Quality management efficiency.
7.12 This indicator intends to identify Earnings and Profitability
problems with asset quality in the loan portfolio. 7.14 Earnings and profitability of an FI
This is the ratio of gross non-performing loan/ reflects its efficiency in managing resources
lease to total loan/lease. At the end of June and its long term sustainability. Among various
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Chapter-7 Regulation, Performance and Supervision of NBFIs
measures of earnings and profitability, the Table 7.4 Trends in Profitability of NBFIs
best and widely used indicator is the return on (percent)
2012 2013 2014 2015 2016 2017 2018*
assets (ROA) which is supplemented by return Return on equity (ROE) 10.4 7.5 9.9 9.9 6.9 8.3 2.5
on equity (ROE). ROA and ROE of all the NBFIs Return on asset (ROA) 1.9 1.5 1.8 1.8 1 1.14 0.32
* As of 30 June 2018.
in June 2018 were 0.32 and 2.50 respectively Source: Department of Financial Institutions and Markets, BB.
(Table 7.4).
Unsatisfactory”. The remaining one FI is yet to
Liquidity come under this rating.
7.15 NBFIs are allowed to mobilize term Legal Reform and Prudential Regulations
deposit only. At present, term liabilities are
7.18 As part of the ongoing efforts, in FY18,
subject to a statutory liquidity requirement
some legal and regularity policy measures have
(SLR) of 5.0 percent inclusive of average 2.5
been taken to improve the financial strength of
percent (at least 2.0 percent in each day) cash NBFIs and to ensure the transparency in their
reserve ratio (CRR) on bi-weekly basis. The operation.
SLR for the NBFIs operating without taking
Capital Adequacy and Progress of BASEL
term deposit is 2.5 percent.
Accord Implementation in NBFIs
Sensitivity to Market Risk
7.19 Basel-II has been implemented in
7.16 The sensitivity to market risk reflects the NBFIs since 1 January 2012. Prudential
the degree to which changes in interest rates guidelines on capital adequacy and market
or equity prices can adversely affect an FI's discipline (CAMD) has been issued to promote
asset-liability position, earnings and capital. international best practices and to make the
When evaluating this sensitivity component, capital of NBFIs more risk-based as well as
more shock resilient. NBFIs have to follow the
consideration is given to management's ability
guidelines as statutory compliance.
to identify, measure, and control market risk
via the implementation of effective Core Risk Corporate Governance in NBFIs
Management System. Vulnerability of the FI 7.20 BB has taken some policy measures
in a stressed situation emanated from either in order to put in place good corporate
an interest rate or equity price shock (or both) governance in NBFIs. BB has clearly specified
should be taken under consideration to evaluate the authority, responsibility and functions of the
sensitivity. For many NBFIs, the primary source Board of Directors, Executive Committee, Audit
of market risk arises from non-trading positions Committee, Management and Chief Executive
and their sensitivity to changes in interest rates. Officer of NBFIs. The number of Directors in the
Board ranges from 9 to 11. The Board sets and
Composite CAMELS Rating
approves the vision/ mission, annual strategic
7.17 At the end of December 2017, out of business plan, key performance indicators,
34 NBFIs, in the composite CAMELS rating core risk management guidelines, etc. Chief
no FI got evaluation as "1 or Strong", 8 were Executive Officer is responsible to conduct
evaluated as "2 or Satisfactory", 20 were "3 or day to day functions and materialization of the
Fair”, 3 were "4 or Marginal" and 2 were "5 or strategic business plan.
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Regulation, Performance and Supervision of NBFIs Chapter-7
Asset Classification and Provisioning improved policies and procedures in line with
internationally best practices for their risk
7.21 NBFIs are required to maintain
management framework. The Guidelines
provision for expected losses on loans,
encompass all the probable risks that include
advances, leases, investments considering
credit risk, market risk, liquidity risk, operational
aging analysis. Aging analysis of overdue loan/
risk, compliance risk, strategic risk, reputational
lease classifies them to standards, special
risk, environmental risk, and money laundering
mention accounts, sub-standards, doubtful risk.
and bad/ losses, requiring the NBFIs to keep
provision by 1 percent, 5 percent, 20 percent, Consumer Protection Regulations
50 percent and 100 percent respectively. At Schedule of Charges
the end of June 2018, the total outstanding
7.24 BB has rationalized the charges
loan/ lease of NBFIs stood at BDT 641.9 billion
of some services to ensure the interest of
of which NPL was BDT 59.2 billion which is 9.22
depositors/ investors/ customers and advised
percent of total loan/ lease (Table 7.3). At the
all NBFIs to display the complete schedule of
end of June 2018, the amount of provisioning
charges in suitable places in their branches
was BDT 4.18 billion. and head offices so that the clients can
Loan Rescheduling Policy easily notice them. They are also advised to
publish the same information in their websites.
7.22 For the purpose of rescheduling of BB monitors these issues and NBFIs are
loans/ leases NBFIs must receive down required to submit semi-annual statements
payments from clients. NBFIs will take minimum in these regard. No charge/ commission like
of 15 percent, 30 percent, 50 percent of overdue commitment fee, supervision fee and cheque
amount or 10 percent, 20 percent, 30 percent dishonor fee can be charged. A circular has
of outstanding amount, whichever is lower, as been issued in the year 2018 to bring uniformity
down payment in cash for first time, second in the schedule of fees/ charges/ commissions
time and third time rescheduling respectively. against the loan/lease accounts by financial
institutions and for the protection of customer
Core Risk Management
interest.
7.23 Guidelines on five core risk areas
Guidelines on Products, Services and
namely credit risk management, internal control
Commercial Paper of Financial Institutions
and compliance, asset-liability management,
in Bangladesh
prevention of money laundering and terrorist
financing and information and communication 7.25 Along with the banks, the financial
technology (ICT) security have been issued institutions with their customized products and
for NBFIs. Besides these, with a view to services have emerged as the competitive
address and manage all the risks in a more financial intermediaries to meet the growing
prudent and organized way the 'Integrated and changing demands of customers. The
Risk Management Guidelines for Financial “Guidelines on Products and Services of
Institutions' have also been issued to adopt Financial Institutions in Bangladesh” has
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Chapter-7 Regulation, Performance and Supervision of NBFIs
outlined the different characteristics of products uploads that in the BB website and updates on
and services offered by NBFIs, which helps monthly basis. The cost of funds index is used
financial institutions to adapt with the changing as an acceptable reference rate. The base rate
environment and also to promote sound risk system facilitates the interest rate determining
management system and bring discipline in process and ensures more transparency and
launching new products and services. In order accountability of the NBFIs. The cost of funds
to set some regulations regarding commercial of NBFIs' was 7.89 percent in December 2017,
paper 'Guidelines on Commercial Paper for which increased to 9.34 percent in June 2018.
Financial Institutions' has been introduced. It
Guidelines on 'Code of Conduct for Banks
has allowed financial institutions to get involved
and Non-Bank Financial Institutions'
in commercial paper as investor, issuer,
guarantor, and issuing and paying agent by 7.27 As part of formulation and
fulfilling the terms and conditions as mentioned implementation of National Integrity Strategy
in the guidelines. (NIS), a 'Code of Conduct for Banks and Non-
Bank Financial Institutions' has been introduced
Cost of Funds Index for NBFIs
in 2017 to increase the integrity, morality,
7.26 NBFIs are regularly submitting their efficiency and responsibilities of banks and
monthly statements of base rate and cost financial institutions, and to ensure transparency
of funds to BB as per guideline published in in their products and services delivery and also
2013. On the basis of those statements, BB to promote rationale behavior between/amongst
prepares an aggregate cost of funds index, banks, NBFIs and their stakeholders.
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