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					Bangladesh Bank


            Role
            and Responsibilities
     Contents

    Role and Responsibilities of Bangladesh Bank
      - Formulation and Implementation of Monetary
        Policy
      – Management of Foreign Exchange
      – Clearing Arrangement of Checks/Bills
      – Supervision of Financial Sector
      – Advising Government on various macro policy
        issues/measures.


2
        Functions of Bangladesh Bank:
        Bangladesh Bank Order 1972

       To formulate and implement monetary policy;
       To formulate and implement intervention policies in the
        foreign exchange market;
       To manage the official foreign exchange reserves;
       To promote, regulate and ensure a secure and efficient
        payment system, including the issue of bank notes;
       To regulate and supervise banking companies and financial
        institutions;
       To play the role of advisor to the government on the impact
        of various policy measures on the economy.

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    Two Other Responsibilities
    Entrusted with Bangladesh Bank

         Applies Exchange Regulation Act, 1947 on behalf
        of the government;
        Exercises the authority given on BB by the Money
        Laundering Prevention Act 2003.




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        Targets and Formulation of
        Monetary Policy
    1. Targets of Monetary Policy
        -Growth of money supply has to be consistent with GDP
          growth rate to ensure a stable inflation rate;
        - Credit flow has to be channeled to productive activities to
          ensure faster economic growth.
    2. Formulation of Monetary Policy
       Growth rate of broad money (total of currency, demand and
        time deposits) is programmed considering projected GDP
        growth, inflation and income velocity of money [GDP to
        broad money supply (M2) ratio];
          In line with this, annual levels of foreign assets and
        domestic credit to public and private sector are also
        programmed.
5
     Implementation of Monetary Policy

    To keep broad money supply on desired growth path, Money
      and Credit Program is implemented by different ways:
        - Changes in the broad money supply is effected by
      increasing/decreasing reserve money (total of currency
      issued both by government and the BB, and balances of
      banks with the BB);
       - Auctions of government treasury bills and bonds and
      auction of repo and reverse repo are used;
       - Supply of broad money can be influenced through
      changing cash reserve ratio (CRR) and effecting market
      interest rates by varying discount rate of central bank.
6
        Deepening of Money Market –
        Recent Measures
       Introduction of Repo (July 2002) and Reverse Repo (April 03);
       Secondary market activities of government securities in the
        inter-bank repo market;
       Electronic registry of treasury bills and bonds;
       Introduction of bonds with 5-year and 10-year tenure (28 Dec
        2003); it will facilitate introduction of private sector bonds;
       Primary dealership system of government securities has started
        working (11 Dec 2003);
       Private commercial papers are now allowed in the markets;
       SLR reduced to 16 percent from 20 percent ( 8 Nov., 2003);
        As a result: Interest rates are coming down/
7
    Exchange Rate, Intervention in the
    Foreign Exchange Market
      1. Successful and stable introduction of market based
     floating exchange rate of Bangladesh Taka from 31 May
     2003;
          This system has enabled the economy to face shocks
     without seriously hampering productive activities;
     2. Exchange rate of Taka is indirectly influenced by
     changing liquidity supply in the call money market through
     repo and reverse repo. Bangladesh Bank, from time to time,
     buys US dollar at prevailing rate from local market in the
     interest of keeping exchange rate competitive for exports
     and raising level of foreign exchange reserves.
8
    Foreign Exchange Reserve Management

      1. Rising trend in reserve position achieved (reserves
    rose from low level of $ 1305 million in Dec. 2001, to
    $ 2727 million on 8 April 2004);
    2. In the interest of investment liquidity and security,
    Bangladesh Bank, like other central banks, carefully
    invests it reserves only in major convertible currencies
    with important central banks and some international
    commercial banks with high credit ratings;
    3. Like other central banks, Bangladesh Bank avoids
    earning profit through risky currency trading arising
    from exchange fluctuations of different currencies.
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         Supply of Notes/Currencies - 1
        Bangladesh Bank and chest branches of Sonali Bank supply
        Notes/currencies as per demand of the public;
      Withdrawal of soiled and torn notes from circulation has been
        made easier and quicker;
         - Acceptance of torn and soiled notes from the public is
        now mandatory for the banks;
       - Banks are instructed to bring reissuable and non-reissuable
        notes sorted separately while depositing them in BB;
      - Printing of new notes and their supply increased along with
        quicker withdrawal of torn and soiled notes.

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         Supply of Notes/Currencies - 2

          To reduce the risk of being cheated by counterfeit
         notes -
               - Several security features have been introduced
         including watermark in notes, security thread, intaglio
         print, values printed in Optically Variable Ink etc.;
             - Public awareness about security features of
         genuine notes are created through press releases,
         colorful posters and television video clips.


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          Management of Clearing System of
          Check/Bill etc.
        Bangladesh Bank manages daily clearing of checks/bill/drafts etc. In
         cities/towns where BB has no Offices, Sonali Bank performs the
         function on behalf of BB.
        Clearing functions in Dhaka and Chittagong are partly computerized.
         Similar system is being introduced in Rajshahi by the first half of
         2004. Bogra, Sylhet and Khulna will follow shortly;
        ‘Same day Clearing’ services for checks valued Tk. 5 lakhs or more
         is available in Dhaka since 4 Oct. 2003;
        Mechanism for clearing of checks/bills drawn on a bank of a
         different town within shortest possible time is being processed;
        Introduction of credit card/debit card by banks are being encouraged;
        Automated check clearing system using machine readable check
         would be introduced soon, as a part of the new IT platform of BB.

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     Financial and Banking Sectors of
     Bangladesh




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          Main Problems of the Banking Sector
        Low quality of assets: 22% of total credit is classified. The
         ratio of classified loans of NCBs is 29%, Private Commercial
         Banks 12%, Foreign Commercial Banks 3% and Specialized
         Banks 47%;
        Lack of good governance, accountability and
         transparency: Illegal credit facilities taken by directors in
         false names; interference of directors in routine matters of the
         bank;
        Inadequacy of effective risk management system:
         Increased credit risk, inappropriate management of assets and
         liabilities, weaknesses in exchange transactions, absence of
         effective internal control and compliance culture have caused
         weak accountability.
14
     Financial Sector Reform

        Reform program was initiated in early 1990s
         with World Bank assistance;
        The pace of reform has accelerated during the
         past two years;
        On-going reforms are home-grown, introduced
         after discussions with banks and financial
         institutions and with local experts.


15
          Reduction of Non Performing Loans:
          Regulatory and Legal Reforms - 1
        Enactment of Financial Loan Court Act 2003: Setting up
         of special courts dealing exclusively with default loans;
         prescribing time limits for courts to give judgment on
         original and appeal suits; mandating banks to sell
         collaterized security before filing cases; provision for
         alternative dispute resolution mechanism;
        Loan rescheduling criteria spelled out and rationalized by
         making successive rescheduling more costly;
        Guidelines for loan write-off issued;
        The single borrower/single group-borrowers credit limit
         fixed; large loan limit tagged to bank’s NPL ratio.

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         Reduction of Non Performing Loans:
         Regulatory and Legal Reforms - 2
        Encouraging syndication of several banks for large
         loans and issuance of guidelines for restructuring
         such loans;
        Announcing incentives for loan recovery to
         encourage bank employees to put extra effects for
         recovery.
        Signing of MOUs with the nationalized commercial
         banks; limiting annual credit growth rate, fixation of
         single borrower limit, restriction on capital
         expenditure;

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     Good Governance, Accountability and
     Transparency
    Redefining and clarifying the roles and functions of the Board and
     management;
    Limiting number of Directors to 13;
    Debarring a person to be a director for a bank for more than six years
     at a stretch;
     Restriction on near relations to be directors for a bank;
    Appointment of two directors to protect depositors’ interest;
    Meeting ‘fit and proper test’ for Bank Directors and the Managing
     Directors;
    Preparation and disclosure of financial information in accordance with
     International Audit Standard;
    Stricter enforcement of banking laws/ regulations by the Bangladesh
     Bank. (so far 3 MDs and 1 Chairman have been removed and 26 bank
     officials fined).
18
        Better Risk management Practices
     Quality of assets have been poor and classification rate was high
       because of absence of good risk management policies, practice,
       processes and structure in the banks. In this backdrop –
      BB took initiative to take a set of recommendations on best
       practice for five core-risk areas, e.g., credit risk management,
       asset-liability management, exchange risk management, internal
       control and compliance and anti-money laundering;
      Banks given directives to introduce with implementation deadline
       the processes, policies and structures based on the
       recommendations;
      Trainings organized to establish effective risk management
       system;
      On-site supervision strengthened to enable risk based audits;
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          Reform of Nationalized Commercial
          Banks
        MOUs signed with Bangladesh Bank for the first
         time;
        Completion of Special Audits to assess assets quality
         by local audit firms with international affiliation;
        Appointment of a Financial Advisor to help privatize
         one NCB;
        Hiring of a CEO and a management team for another
         NCB;
        Recruitment of Experts to assist management of
         other two NCBs;
20
     Position of Classified Loans

                                     December December
                                         1999     2003
      Gross Classified Loans              41       22
      (percentage of total credit)
      Net Classified Loans                35       19
      (percentage of total credit)


21
  Strengthening Bangladesh Bank

       Functional                     Automation
     Reorganization                     of BB




                      Modernization
  Human                                       Capacity
 Resources                                    Building
Development



                      Strengthening
                         the Legal
                        Framework
     Strengthening Bangladesh Bank

        Amendment of BB Order 1972: Board of Directors is
         empowered to formulate and implement all regulations
         without government approval;
        Reorganization and modernization: modernization of
         structure and working system of BB;
        Computerization of functions of Bangladesh Bank;
        Human Resources Development: Training of Officers/staff
         and reforming policy supporting promotion and employment
         purely on the basis of talent;
        Capacity Building: Strengthening Research Department,
         prudential regulation and supervision and accounting and
         audit standards.
23
     Thank You


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