The central bank will introduce more regulations and strengthen supervision over banks in the coming months to avert any "systemic crisis" in the sector, the governor said yesterday.

Atiur Rahman, however, did not detail the regulations in the pipeline and asked the banks not to be worried about the changes.

He was talking to the chief executive officers of Banks at the launch of the Financial Stability Report 2011 at the Bangladesh Bank office.

“It doesn't mean that the sector will become over-regulated,” Rahman said.

However, the BB efforts alone will not work without the implementation of prudential rules and regulations by banks, non-bank financial institutions, and regulators of other financial intermediaries, said the governor.

The report, launched by the BB for the second time, was prepared to understand the resilience of the financial system in dealing with unanticipated and adverse shocks.

The report outlined the major trends in the banking industry and the non-bank financial institutions with respect to their impact on financial stability.

The report found that the interest rate spread (the difference between lending and deposit rates) in the banking sector increased to 5.5 percent in December 2011 from 4.9 percent in January 2011.

The report blamed the hike in spread on higher spread in the foreign commercial banks.

“The foreign banks' average spread was almost double the industry's average,” it said.

According to the report, the banking sector's balance sheet grew by 21 percent to Tk 587,400 crore at the end of 2011 compared to that a year ago.

The report also showed that the loans and advances disbursed by the banks in 2011 decreased by 1.3 percentage points compared to the previous year.

It said the inter-bank money market faced a liquidity pressure in 2011 due to huge government borrowings amid a slowdown in savings by the households because of high inflationary pressure.

However, in 2011, the amount of government bonds held by banks was Tk 66,210 crore, up by 11.3 percent than a year ago.

The report also said prudent steps by the central bank helped the commercial banks to reduce their credit-deposit ratio to 78 percent in December 2011 from 86 percent in January the same year.

The banking sector's net profit decreased by 9.7 percent to Tk 752 crore in 2011 from Tk 833 crore in 2010 although the operating profit rose by 9.3 percent to 1,868 crore, the report said.

However, Islamic banks showed a remarkable growth in 2011 as their assets grew by 25.8 percent, deposits by 25.8 percent, and loans and advances by 21.4 percent compared to those in 2010.

The governor asked the CEOs of Banks to remain extra cautious about the risks that may arise from internal and external shocks.

“Don't take too much risk to profit more,” said Rahman.

Deputy Governor SK Sur Chowdhury, Chairman of Association of Bankers Bangladesh Nurul Amin and BB's Banking Supervision Adviser Glenn Tasky were also present.

News: The Daily Star/Bangladesh/8th-Oct-12

Bangladesh Bank Governor Dr Atiur Rahman, speaks at a national conference on Towards Bangladesh-at-50 at the Institute of Diploma Engineers in Dhaka Saturday.

News: The Daily Sun/Bangladesh/7th-Oct-12

Bangladesh Bank will release Tk 200 billion before two big religious festivals – Eid-ul-Azha and Durga Puja – to prevent volatility on the call money market by increasing cash flow to the banks.

Of the amount, Tk 80 billion are newly printed notes while the rest Tk 120 billion will replace old and mutilated notes, said central bank sources.

BB Governor Dr Atiur Rahman assured that the call money rate before Durga Puja and Eid-ul-Azha will remain stable as the central bank has taken initiatives to ensure adequate supply of cash.

“I hope the market will remain stable this year,” he said while speaking at a seminar in the city Saturday.

The central bank sources claimed that BB has a reserve of Tk 230 billion cash against the banks’ total demand of Tk 190 billion this year.

On the occasions of Eid-ul-Azha and Durga Puja, the demand for cash usually gets increased every year.

Hindus’ Durga Puja will be held from 15th to 24th October while Muslims’ Eid-ul-Azha is likely to be observed on 26th October depending on moon sight.

This year, the central bank has received a demand of Tk 190 billion cash from the country’s banks to meet the hectic rush of clients before the festivals.

As the demand for cash gets intensified before festivals, the call money market faces supply crunch and becomes volatile, leading the interest rates to go high, said a senior BB official.

In 2010, the call money rate unusually skyrockets to 175 percent before Eid-ul-Azha.

After that, the country’s call money rate remains relatively stable as the central bank proactively interferes to maintain sufficient supply of local currency.

Before last Eid-ul-Fitr in August, the call money market was almost calm as the central bank supplied Tk 170 billion to the banks.

Over the last couple of days, the inter-bank call money rate ranges between 7 and 9 percent. The BB data shows the weighted average call money rate on last Thursday was 7.46 percent.

News: The Daily Sun/Bangladesh/7th-Oct-12

Bangladesh Bank Governor Atiur Rahman yesterday called for more control over state-run commercial banks to help them run professionally and enhance their accountability.

Exemption of state-owned banks from some of Bangladesh Bank's supervisory empowerments of Banking Companies Act stands in the way of effective supervision of these banks, Rahman said.

"Unless this differential treatment is done away with, management weaknesses from insufficient accountability are likely to linger in the state owned banks," he said.

Rahman spoke at a seminar, "Towards Bangladesh at 50: Financial Sector Resilience- Issues and Prospects" organised by Dhaka School of Economics at the Diploma Engineers' auditorium in the capital.

Rahman's comments came as the central bank's inability to govern the country's state banks the way it supervises the private commercial banks is widely blamed for the underperformance and irregularities at the state banks.

The central bank has full control over the private banks, but it does not have the same control over the state-run banks.

The Banking Companies Act stipulates that the central bank can dissolve a board of a private bank and appoint an administrator to it if its board of directors cannot run the bank properly. But in case of state-run banks the central bank can only recommend actions to the government.

The law says that the government will seriously consider the recommendation. But experts say the government does not always consider the recommendation of the central bank as seen recently when Bangladesh Bank recommended the finance ministry to restructure the board of Sonali Bank Ltd for its gross irregularities in lending Tk 3,600 crore to Hall-Mark Group and some other companies.

The finance minister came up with comments that the central bank cannot make such recommendations, which surprised many.

The governor also said the financial sector has fared in terms of resilience and stability under BB's evolving supervision approach outlined above.

Non-performing loans as percentage of total assets are at single digit levels, liquidity stresses arising from unduly high advance deposit ratios in some banks last year have eased off, according to Rahman.

“Stress testing exercises conducted by us and by World Bank and International Monetary Fund financial sector assessment missions have assessed Bangladesh's financial sector as resilient against moderate shocks,” he said.

Rahman however said this fairly reassuring overall view does not however mean that the country has now no issue in financial sector stability and resilience to be concerned about.

"The overall picture masks considerable variation in capital adequacy and solvency positions between bank groups.”

Foreign banks maintain capital cushions well above prescribed minimum and local private sector banks generally meet requirements but state banks fall well behind in asset quality and capital adequacy, he said.

"Even in local private sector banks, the reported low nonperforming loan levels are due in part to somewhat looser local loan classification and provisioning requirements relative to international best practices,” he said.

"On the whole our financial sector continues suffering from (and to some extent sharing) the general deficiencies of local business culture in respect of corporate governance and financial disclosures."

Although not serious immediate threats to institutional resilience and financial stability, these deficiencies limit capacities of banks in forging strong, deep relationships in international financial markets to attract investment inflows in volumes needed for realising the nation's growth aspirations, Rahman said.

The recent BB revision of instructions on loan classification, rescheduling and provisioning are intended to address this shortcoming, by aligning local standards with international norms.

The governor also said much of the country's growth related new investments will have to be attracted from abroad, which would heighten the country's financial sector's exposure and vulnerabilities to market volatilities in the global scene.

"In step with rising external exposures, our financial sector will need to build up and bolster resilience against shocks from perennial volatilities and instabilities of the international markets."

Besides external shocks, there are demand and supply shocks of domestic origin to build resilience against.

Rahman said preparatory work for Basel III implementation in Bangladesh financial sector is ongoing, for full implementation by the 2018 deadline or earlier.

Rahman said fallouts on financial sector from two stock market price bubble collapse episodes of 1995 and 2010 were likewise limited and easily contained.

News: The Daily Star/Bangladesh/7th-Oct-12

Bangladesh Bank (BB) advised the commercial banks to encourage traders for opening Letter of Credit (LCs) for import of essentials to keep the prices of the essential commodities stable ahead of two major festivals – Eid-ul-Azha and Durga Puja.

Sources said the central bank has already sent letters to the state-owned and private commercial banks to this effect.

The central bank’s latest advice came in the wake of declining trend of overall imports in recent months as the central bank maintains a tightening monetary policy to contain the inflationary pressure.

Sources said the directive was given to contain price spiral of essentials during the upcoming festive seasons since some dishonest traders try making hefty profit by taking advantage of supply crisis ahead of any major festival.

After announcing its monetary policy in last July, the central bank asked the commercial banks not to fund any non-productive import. The BB is executing the same monetary policy since immediate-past fiscal.

According to the central bank statistics, opening of LCs against imports declined by slightly above 13 percent to $ 2.4 billion in August compared to $ 2.8 billion in July last. The settlement of LCs fell by 12 percent to $ 2.4 billion in August compared to $ 2.8 billion in the previous month.

News: The Daily Sun/Bangladesh/4th-Oct-12