Chapter-7
Performance, Regulation and Supervision of NBFIs
7.1 Non Bank Financial Institutions
(NBFIs) have emerged as an important Table 7.1 Structure of NBFIs
segment of financial system in Bangladesh. 2010 2011 2012 2013 2014 2015 2016*
NBFIs offer diversified financial services No. of NBFIs 29 31 31 31 31 32 33
Government- owned 1 2 3 3 3 3 3
mostly long-term in nature to cater the ever
Joint-venture 8 8 10 10 10 10 11
changing demands of customers. NBFIs play Private 20 20 18 18 18 19 19
crucial roles in providing additional financial New branches 20 53 8 7 7 15 22
services that cannot be always met by the Total branches 108 161 169 176 183 198 220
* As on 30 June 2016.
banks. In addition, NBFIs are engaged in the Source: Department of Financial Institutions and Markets, BB.
capital market as well as in real estate sector
of Bangladesh. As a watchdog, Bangladesh Chart 7.1 Investment pattern of NBFIs
Bank supervises NBFIs through a risk-based as of 30 June 2016
supervisory system so that NBFIs can deliver Others
13.3% Industry
financial services efficiently. NBFIs showed 43.0%
Agriculture
strong performance in terms of growth in 1.9%
assets and deposits during FY16. Merchant
banking
3.9%
7.2 Bangladesh Bank issues licence and
Trade and
supervises NBFIs under the Financial commerce
17.7%
Institution Act, 1993. At present, the minimum Margin Real
loan estate
paid up capital for NBFIs is Taka 1.0 billion as 3.6% 16.6%
per the Financial Institution Regulation, 1994. Source: Department of Financial Institutions and Markets, BB.
NBFIs' business line is narrow in comparison
2015 from Taka 520.1 billion in 2014. At the
with Banks in Bangladesh. NBFIs have been
end of June 2016, assets of NBFIs increased
allowed to offer term deposit service for
to Taka 672.8 billion.
tenure of at least three months effective from
2 December 2013. A.2. Investment
7.3 Presently, out of 33 NBFIs, three are 7.5 NBFIs deploy funds for providing mainly
Government-owned, 11 are joint venture and term loan in different sectors of the economy
the rest 19 are locally private-owned. with major concentration in industrial sector.
Meanwhile, the branch network increased to Sector wise composition of NBFIs' investment
220 as on 30 June 2016. The Structure of at the end of June 2016 was as follows:
NBFIs is shown in Table 7.1. industry 43.0 percent, real estate 16.6
percent, margin loan 3.6 percent, trade and
A.1. Assets
commerce 17.7 percent, merchant banking
7.4 The asset of NBFIs went up 3.9 percent, agriculture 1.9 percent and
substantially by 17.5 percent to 611.0 billion in others 13.3 percent.
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Performance, Regulation and Supervision of NBFIs Chapter-7
7.6 NBFIs are allowed to invest in the Table 7.2 Assets, liabilities and
capital market to the extent mentioned in the deposits of NBFIs (billion Taka)
Financial Institutions Act, 1993. In 2015, all 2010 2011 2012 2013 2014 2015 2016*
NBFIs' total investment in capital market was Total assets 251.5 288.4 333.9 436.3 520.05 611.0 672.8
Taka 19.4 billion compared to Taka 18.4 Total liabilities 206.8 235.7 274.3 350.4 424.24 509.0 572.0
Liabilities-assets ratio 82.2 81.7 82.2 80.3 81.5 83.3 85.0
billion in December 2014. Investment in
Total deposit 94.4 112.6 145.4 198.3 238.5 318.1 351.4
capital market accounted for 3.2 percent of Deposit as % of
the total assets of all NBFIs. At the end of total liabilities 45.7 47.8 53.0 56.6 56.2 62.5 61.4
* As on 30 June 2016.
June 2016, NBFIs total investment in capital Source: Department of Financial Institutions and Markets, BB.
market stood at Taka 21.1 billion.
Chart 7.2 Assets, liabilities and their
A.3. Deposits ratios of NBFIs
7.7 Total deposits of the NBFIs in 2015 800 86
700 85
rose to Taka 318.1 billion (62.5 percent of 84
600
total liabilities) from Taka 238.5 billion (56.2 500
83
82
billion Taka
Percent
percent of total liabilities) in 2014 showing an 400
81
300
overall increase of 33.4 percent. At the end of 80
200 79
June 2016, total deposit of NBFIs increased 100 78
to Taka 351.4 billion. 0 77
2016*
2009
2010
2011
2012
2013
2014
2015
A. 4. Other Liabilities and Equity
Total assets Total liabilities
Liability-asset ratio (RHS)
7.8 The aggregate liability of the industry * As on 30 June 2016
increased to Taka 509.0 billion in 2015 from Source: Department of Financial Institutions and Markets, BB.
Taka 424.2 billion in 2014 while equity Coupon Bond" were issued by IDLC Finance
increased to Taka 102.0 billion compared to Limited, Taka 3.0 billion non-convertible zero
Taka 95.8 billion during the same period coupon bonds by LankaBangla Finance
showing an overall increase of 20.0 percent Limited and Taka 1.0 billion Fixed Rate Non-
and 6.5 percent respectively. At the end of convertible Subordinated Bond was issued by
June 2016, aggregate liability and equity Reliance Finance Limited as of June 2016.
increased to Taka 572.0 and Taka 100.8
B. Performance and Rating of NBFIs
billion respectively.
7.10 Like banks, the performance of NBFIs
A.5. Bond and Securitisation Activity
is also evaluated through the CAMELS rating
7.9 The bond market in Bangladesh is yet which involves analysis and evaluation of the
to be modernised. There are few players with six crucial dimensions. The six indicators used
a limited number of instruments. NBFIs play a in the rating system are capital adequacy,
significant role for the development of bond asset quality, management efficiency,
market through issuing Zero Coupon Bonds earnings, liquidity and sensitivity to market risk.
and Asset-backed Securitised Bonds. By
B.1. Capital Adequacy
taking NOC from the Department of Financial
Institutions and Markets (DFIM), Taka 2.5 7.11 Capital adequacy focuses on the total
billion "IDLC Infrastructure and SME Zero position of NBFIs' capital and protects the
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Chapter-7 Performance, Regulation and Supervision of NBFIs
depositors from the potential shocks of losses Table 7.3 Total loan/lease and
that an NBFI might incur. It helps absorb major classified loan/lease (billion Taka)
financial risks related to credit, market, interest 2010 2011 2012 2013 2014 2015 2016*
rate, etc. NBFIs in Bangladesh have been Loan/lease 178.1 209.7 252.1 273.6 372.8 448.5 498.6
instructed under the Basel Accord to maintain Classified loan/lease 10.5 10.3 13.7 16.8 19.7 40.0 45.1
Capital Adequacy Ratio (CAR) of not less than Classified loan/ lease
10.0 percent with at least 5.0 percent in core as % of total 5.9 4.9 5.4 6.1 5.3 8.92 9.0
capital. At the end of June 2016, out of 33 * As on 30 June 2016.
Source: Department of Financial Institutions and Markets, BB.
NBFIs, (one NBFI is yet to come under this
operation) 2 were evaluated as "1 or Strong",
Chart 7.3 NBFIs total, classified loan/lease
15 were "2 or Satisfactory", 14 were "3 or Fair" and their ratios
and 1 was "4 or Marginal" in the capital
600 10
adequacy component of the CAMELS rating.
500 8
B.2. Asset Quality 400
6
300
Percent
billion Taka
7.12 The ratio of gross nonperforming loan 4
200
/lease to total loan/lease is used to judge the 100 2
asset quality of NBFIs. At the end of June 0 0
2016*
2009
2010
2011
2012
2013
2014
2015
2016, the NPL ratio for NBFIs was 9.0
percent. In the total asset composition of all Loan/lease Classified loan/lease
NBFIs, the concentration of loans, lease and Classified loan/lease as % of total loan/ease (RHS)
* As on 30 June 2016.
advances was 74.2 percent. At the end of Source: Department of Financial Institutions and Markets, BB.
June 2016, out of 33 NBFIs, 1 was evaluated
as "1 or Strong", 7 were "2 or Satisfactory", 14 were "2 or Satisfactory", 4 were "3 or Fair", 2
were "3 or Fair", 9 were "4 or Marginal" and 1 were "4 or Marginal" and 1 was "5 or
was "5 or Unsatisfactory" in the asset quality unsatisfactory" in the Management Capacity
component of the CAMELS rating matrix (the component of the CAMELS rating (the
remaining one NBFI is yet to come into remaining one NBFI is yet to come into
rating). rating).
B.3. Management Efficiency B.4. Earnings and Profitability
7.13 In financial institutions, management 7.14 Earnings and profitability of an NBFI
efficiency represents the ability of reflects its efficiency in managing resources
management for transforming inputs and its long term sustainability. Among various
(deposits, other funds and human resources) measures of earnings and profitability, the
into outputs (investments/ leases and other best and widely used indicator is the return on
income generating assets). Total expenditure assets (ROA) which is supplemented by return
to total income, operating expenses to total on equity (ROE). ROA and ROE of all the
expenses, earnings and operating expenses NBFIs in June 2016 were 0.8 and 5.6 percent
per employee and interest rate spread are respectively. At the end of June 2016, out of
generally used to gauge management 33 NBFIs, 3 were evaluated as "1 or Strong",
efficiency. At the end of June 2016, out of 33 16 were "2 or Satisfactory", 11 were "3 or Fair"
NBFIs, 4 were evaluated as "1 or Strong", 21 and 2 were "4 or Marginal" in the earnings and
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Performance, Regulation and Supervision of NBFIs Chapter-7
profitability component of the CAMELS rating Table 7.4 Profitability of NBFIs
(percent)
(the remaining one NBFI is yet to come into
2009 2010 2011 2012 2013 2014 2015 2016*
rating).
Return on equity (ROE) 20.9 24.4 11.7 10.4 7.5 9.9 9.9 5.6
B.5. Liquidity Return on asset (ROA) 3.2 4.3 2.1 1.9 1.5 1.8 1.8 0.8
* As on 30 June 2016 (Annualised)
7.15 NBFIs are allowed to mobilise term Source: Department of Financial Institutions and Markets, BB.
deposit only. At present, term liabilities are
Satisfactory", 15 were "3 or Fair", 4 were "4 or
subject to a statutory liquidity requirement
Marginal" and 1 was "5 or Unsatisfactory" in
(SLR) of 5.0 percent inclusive of average 2.5
the sensitivity to market risk component of the
percent (at least 2.0 percent in each day)
CAMELS rating matrix (the remaining one
cash reserve ratio (CRR) on a bi-weekly
NBFI is yet to come into rating).
basis. The SLR for the NBFIs operating
without taking term deposit is 2.5 percent. The B.7. Composite CAMELS Rating
Infrastructure Development Company Limited
(IDCOL) established by the Government of 7.17 At the end of June 2016, according to
Bangladesh is exempted from maintaining the the composite CAMELS rating out of 33
SLR. At the end of June 2016, out of 33 NBFIs, 1 was "1 or Strong", 15 were "2 or
NBFIs, 19 were evaluated as "2 or Satisfactory", 13 were "3 or Fair" and 3 were
Satisfactory", 10 were "3 or Fair", 2 were "4 or "4 or Marginal" (the remaining one NBFI is yet
Marginal" and 1 was "5 or Unsatisfactory" in to come into rating).
the liquidity position component of the C. Legal Reform and Prudential
CAMELS rating (the remaining one NBFI is Regulations
yet to come into rating).
7.18 As part of the ongoing efforts to
B.6. Sensitivity to Market Risk strengthen the NBFIs through the adoption of
7.16 The sensitivity to market risk reflects policies aimed at both improving the financial
the degree to which changes in interest rates strength of NBFIs as well as bringing about
or equity prices can adversely affect an greater transparency in their operations, some
NBFI's asset-liability position, earnings and legal and regulatory policy measures have
capital. When evaluating this sensitivity been continued in FY16.
component, consideration should be given to
C.1. Capital Adequacy and Progress of
management's ability to identify, measure,
BASEL Accord Implementation in NBFIs
and control market risk via the implementation
of effective Core Risk Management System. 7.19 Basel-II has been implemented in the
Vulnerability of the NBFI in a stressed NBFIs since 1 January 2012. Prudential
situation from either an interest rate or equity guidelines on capital adequacy and market
price shock (or both) should be taken under discipline (CAMD) has been issued to
consideration to evaluate sensitivity. For many promote international best practices and to
NBFIs, the primary source of market risk make the capital of NBFIs more risk-based as
arises from non-trading positions and their well as more shock resilient. NBFIs have to
sensitivity to changes in interest rates. At the follow the guidelines as statutory compliance.
end of June 2016, out of 33 NBFIs, 3 were In this regard, a high-level Steering
evaluated as "1 or Strong", 9 were "2 or Committee (SC) headed by a Deputy
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Chapter-7 Performance, Regulation and Supervision of NBFIs
Governor of BB comprising NBFIs' Chief C.4. Loan Rescheduling Policy
Executive Officers has been formed for
7.22 For the purpose of rescheduling of
working on policy decisions. Furthermore, a
loans/leases NBFIs must have to receive
Working Group (WG) headed by an Executive
Director of BB has been assisting the SC in down payments from clients. NBFIs take
decision-making. Basel Implementation Cell minimum of 15 percent, 30 percent, 50
(BIC) under DFIM has been formed to assist percent of overdue amount or 10 percent, 20
and carry out the instructions of SC and WG percent, 30 percent of outstanding amount,
on Basel accord implementation. whichever is lower, as down payment in cash
for first time, second time and third time
C.2. Corporate Governance in NBFIs rescheduling respectively.
7.20 BB has taken some policy measures
C.5. Core Risk Management
in order to put in place good corporate
governance in NBFIs. BB has specified 7.23 Guidelines on five core risk areas,
clearly the authority, responsibility and namely, credit risk management, internal
functions of the Board of Directors, Executive control and compliance, asset-liability
Committees, Audit Committees, Management management, prevention of money laundering
and Chief Executive Officer of NBFIs. The and terrorist financing and information and
number of directors in the Board is ranging communication technology (ICT) security
from 9 to 11. The Board sets and approves have been issued for NBFIs. Besides the
the vision/mission, annual strategic planning, above with a view to address and manage all
key performance indicators, core risk the risks in more prudent and organised way
management guidelines, etc. Chief Executive the 'Integrated Risk Management Guidelines
Officer is responsible to conduct day to day for Financial Institutions' have also been
functions and materialisation of the strategic
issued to adopt improved policies and
business plan.
procedures in line with international best
C.3. Asset Classification and Provisioning practices for their risk management
framework. For this purpose, the Guidelines
7.21 NBFIs are required to maintain
encompass all the probable risks that include
provision for expected losses on loans,
credit risk, market risk, liquidity risk,
advances, leases, investments considering
operational risk, compliance risk, strategic
aging analysis. Aging analysis of overdue
risk, reputation risk, environmental risk, and
loans/leases classifies them to standards,
special mention accounts, sub-standards, money laundering risk.
doubtful and bad/losses, requiring the NBFIs C.6. Stress Testing
to keep provision by 1 percent, 5 percent, 20
percent, 50 percent and 100 percent 7.24 NBFIs have been conducting stress
respectively. To boost up SME investment a testing on a quarterly basis since 2010. A new
special allowance of general provision of 0.25 financial position indicator, insolvency ratio
percent provided instead of 1 percent in (IR), artificial intelligence to auto-generate
standard SME loans. At the end of June recommended action plan, rating scale of 1 to
2016, the total outstanding loan/lease was 5, zonal positioning (Green, Yellow and Red)
Taka 498.6 billion of which NPL was Taka through weighted average resilience-
45.1 billion (9.0 percent). weighted insolvency ratio (WAR-WIR) matrix
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Performance, Regulation and Supervision of NBFIs Chapter-7
have been included in the revised guideline E. Cost of Funds Index for NBFIs
for NBFIs. As per the new guideline, NBFIs
7.27 NBFIs are regularly submitting their
carry out stress testing on a quarterly basis.
monthly statements of base rate and cost of
As of June 2016, out of 33 NBFIs 5 were in
funds to BB as per guideline published in
Green Zone, 13 were in Yellow Zone and the
2013. On the basis of these statements, BB
rest 15 were in the Red Zone.
prepares an aggregate cost of funds index,
D. Consumer Protection Regulations uploads that in the BB website and updates it
in its website on a monthly basis. It can be
D.1. Schedule of Charges
mentioned that base rate is the minimum
7.25 BB has rationalised the charges of interest rate below which it is not viable for an
some services to ensure the interest of NBFI to lend in the market. As there was no
depositors/ investors/customers and advised specific guideline before December 2013, the
all NBFIs to display the complete schedule of NBFIs calculated the interest rate in different
charges in suitable places in their branches ways from their own perspective. Some
and head offices to make it visible to the NBFIs provided loan using floating interest
current and potential customers. They are rate. In that case, they imposed the rate
also instructed to post the same information in based on the deviation among their own cost
their websites. BB monitors this issue and of funds. As a result, their efficiency or
NBFIs are required to submit semi- annual inefficiency to manage the liquidity directly
statements in this regard. No affected the clients. The cost of funds index is
charge/commission like commitment fee, used as an acceptable reference rate. The
supervision fee and cheque dishonour fee can base rate system facilitates the interest rate
be charged. determining process and ensures more
transparency and accountability in the NBFIs.
D.2. Guidelines on Products and Services
Base Rate System is used in different
of Financial Institutions in Bangladesh
countries including India, Nepal and Bhutan.
7.26 Along with the banks, the financial In Bangladesh, the base rate system with cost
institutions with their customised products and of funds index has been initiated for the first
services have emerged as the competitive time.
financial intermediaries to meet the growing
F. Guidelines on Commercial Paper for
and changing demands of customers. The
Financial Institutions
'Guidelines on Products and Services of
Financial Institutions in Bangladesh" has 7.28 In order to set some regulations
outlined the different characteristics of regarding commercial paper the 'Guidelines
existing and new products. These guidelines on Commercial Paper for Financial
protect clients' interest as well as provide Institutions' has been introduced. Financial
greater flexibility to financial institutions to Institutions are allowed to be involved in
cope up with changing environment. This also commercial paper as investor, issuer,
helps promoting sound risk management guarantor, and Issuing and Paying Agent by
system and brings discipline in launching new complying the terms and conditions as
products and services. mentioned in the guidelines.
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