The World Bank (WB) has suggested for inclusion of a new guideline by the Bangladesh Bank (BB) on government bailout funds under the proposed Bank Company Act (BCA)-2012, to help cope with any emergency situation in the economy, a top official in the BB said.

The multilateral lending agency has also underlined the need for incorporating a set of minimum criteria for licensing new banks and about selection and duties and responsibilities of bank directors and their accountability under the BCA (amendment), 2012.

The WB has also urged the BB to incorporate proper measures under the BCA pertaining to cross-border insolvency of any Bangladesh-origin bank company.

Besides, the WB has recommended for resolving a good number of banking issues and incorporating those under the BCA (amendment), 2012, sources said.

It has suggested that the central bank should take measures to help minimize legal conflict between willful defaulters and defaulting debtors, outline the structure of the banks and non-banking financial institutions to avoid regulatory arbitrage, ensure resource allocation for supervision, expand the role and linkage of the banking system with the capital market -- from margin lending to financing of shares, and specify rules on cross holdings and optimum structure for growth of financial system under the BCA (amendment), 2012.

Furthermore, the bank has called for BB's having adequate measures under the BCA, 2012 to protect consumer and for incorporation of cross border insolvency principles and necessary changes in foreign branch operations.

The observations of the WB, along with its specific proposals, were recently submitted to the Bangladesh Bank (BB), sources said.

Earlier, the BB prepared the draft of the amended act and submitted it to the Ministry of Finance (MoF) for completion of all the necessary formalities.

Experts said, the term bailout refers to the practice of injecting liquidity to a business when it is bankrupt or close to the point of bankruptcy. There are multiple ways through which this could be acted upon, they added.

The money could be given as a loan to the company which needs the same to repay for maintaining its solvency. Alternatively, the bank can buy the distressed assets of the company and give it in cash in return.

The US in recent years and the European Union (EU) lately announced billions of US dollars and euros respectively for bailout programmes to salvage their large private companies from any collapse.

Top bankers in the BB said, bailout is not a relevant issue for Bangladesh, unlike countries like the US and those of EU. The bailout package can be devised if it becomes inevitable under any complex economic situation, they observed.

"It is not necessary that the BCA, 2012 will incorporate provisions and procedures on bailout mechanism. Rather, as far as our knowledge goes, no country in the globe has similar provisions in their respective BCA," a Deputy Governor of BB told the FE on Saturday.

"Any emergency in an economy, if it really emerges, should be dealt with under an emergency regulation," he added.

He said the criteria for new banks, tests on fitness and eligibility for bank directors, their duties and accountability -- are very much elaborate and in existence in the country -- in the form of separate regulations.

He said it is not a prudent idea that everything about how to run banking companies has to be incorporated in the BCA.

"We have separate guidelines on almost each and every issue, raised by the WB and the International Monetary Fund (IMF)," an Executive Director of BB said.

Earlier, the IMF expressed its reservations over a number of provisions, including those relating to acquisition of problem banks and the tenure of bank directors that were incorporated in the proposed amendments to the Bank Company Act (BCA).

The IMF also raised questions on the proposed regulation about maintenance of capital adequacy and suggested that the authorities concerned should specify appropriate and relevant criteria for directors and officials of banks and also for establishing new banks.

Officials in the MoF said a high-powered committee, headed by former secretary, Mr Abdul Mubin, was formed about two months back to scrutinise the proposed amendments.

Upon the completion of this examination, the amendment would be placed before the cabinet and then before the parliament for its enactment.

The Financial Express/ Bangladesh/ 20th May 2012