Question analysis

Chapter : Method of credit control

1. Discuss the open market policy as a method of credit control, what are the condition
essential for the success of the bank rate policy?
2. What are the selective method of credit control that the central bank follows?

Essential Conditions for the Success of Bank Rate Policy

1. Active Money Market

– The financial market must work smoothly so changes in the bank rate quickly affect
other interest rates.
2. Responsive Banks
– Commercial banks need to react to the bank rate by changing their own interest rates on
loans and deposits.
3. Low Bad Loans
– If banks have too many unpaid loans, they may be unwilling to lend, even if interest
rates are low.
4. Not Too Much Extra Cash in the System
– If banks already have more than enough money, they won’t need to borrow from the
central bank, so rate changes won’t matter.
5. Government Should Not Borrow Too Much
– If the government keeps borrowing a lot, it can cancel out the central bank’s efforts to
control money flow.
6. Clear Communication
– The central bank must clearly explain what it’s doing and why, so people and
businesses know what to expect.
7. Stable Foreign Investment Flow
– Sudden movement of foreign money in or out of the country can disrupt the impact of
interest rate changes.
8. Logical Business and Consumer Reactions
– People and companies must respond sensibly to rate changes—borrowing less when
rates go up and more when rates go down.
 BANGLADESH BANK
1. What are the mission and vision of Bangladesh bank? Recents regulatory development
undertaken by Bangladesh bank?
2. Define deposit insurance? Explain the objective and liabilities of fund under deposit
insurance? Write the guidelines regarding the premium of the insured bank liability of the
fund?
3. The 4 types of payment system ? how does the bb focus on the payment system oversight

Here’s a simplified summary of the recent regulatory developments by Bangladesh Bank in

2024–2025, written in clear and straightforward terms:

🏦 1. Interest Rate Hike

 Bangladesh Bank raised its main policy rate to 10% to fight inflation, especially rising
food prices.

📈 2. New Exchange Rate System

 A "crawling peg" system was introduced to manage the value of the taka more
smoothly against the US dollar and reduce currency instability.

🔍 3. Big Audits for Banks

 Bangladesh Bank hired major global audit firms (EY, Deloitte, KPMG) to check the
books of banks suspected of losing $17 billion due to corruption and mismanagement.

👔 4. Changes in Bank Leadership

 The government and central bank replaced top leaders (like MDs and chairmen) in
several banks to improve governance and accountability.
🧾 5. New Rules for Bank Mergers

 Guidelines were issued to merge weak banks with stronger ones. Examples:
o Padma Bank merged with EXIM Bank
o BASIC Bank merged with City Bank

📉 6. Stricter Rules for Loan Defaults

 New actions are being taken against willful loan defaulters, and stricter rules are in
place to prevent people from taking loans they can't repay.

📊 7. Better Risk Management

 Banks now follow new stress testing rules to see how they would handle financial
shocks.
 A system called Risk-Based Supervision is being rolled out to monitor banks more
effectively.

💼 8. IFRS 9 Implementation

 From January 2025, banks must follow international accounting rules (IFRS 9) to
better measure and report risky loans.

🌍 9. Offshore Banking Law

 A new law now officially allows offshore banking, helping banks do business in foreign
currencies and attract investment.

These steps are meant to:

✅ Make banks stronger
✅ Reduce corruption
✅ Control inflation
✅ Attract foreign investment
✅ Improve trust in the banking system
Explain the objective and liabilities of fund under deposit
insurance? Write the guidelines regarding the premium of the
insured bank liability of the fund?
📊 Liabilities of the Deposit Insurance Fund

The liabilities of the DIF refer to what the fund is responsible for:

1. Paying Insured Depositors

– The fund must pay out the insured amount (currently Tk 1,00,000 per depositor per
bank) if a bank is declared insolvent or liquidated.
2. Operational Costs
– Administrative and legal expenses related to managing the fund.
3. Compensation within Timeframe
– Bangladesh Bank must make payments from the fund within 90 days after the bank is
declared closed.

💼 Guidelines Regarding Premium of the Insured Bank Liability

Under the current regulatory framework:

Item Details

Who Pays the All scheduled banks, including conventional and Islamic banks, must
Premium? pay premiums.

The premium is set at 0.08% of total insured deposits, but

Premium Rate
Bangladesh Bank may revise this rate.

Payment Frequency Banks must pay the premium semi-annually (twice a year).

Calculation Method Premiums are calculated based on the average of daily deposit
 Item Details

balances of insured accounts.

Penalty for Late Banks failing to pay on time may face penalties or restrictions from
Payment Bangladesh Bank.

Premium Collection Bangladesh Bank acts as the manager and custodian of the Deposit
Authority Insurance Fund.

✅ 1. Money Market

📌 What it is:

A short-term borrowing and lending market, typically for less than one year. It provides
liquidity to financial institutions.

🔍 Key Instruments:

 Treasury Bills (T-bills)

 Repurchase Agreements (REPO)
 Call money (overnight lending)
 Commercial papers

🎯 Purpose:

To manage short-term cash needs and ensure liquidity in the financial system.

✅ 2. Taka Treasury Bond Market

📌 What it is:

A market where the Government of Bangladesh issues long-term debt instruments (more than
one year) called Taka Treasury Bonds.

🔍 Key Features:

 Maturity: 2, 5, 10, 15, 20 years

 Fixed interest (coupon) rates
 Used to finance the government budget deficit
  Risk-free investment for banks and institutions

🎯 Purpose:

To raise long-term funds for the government and develop a benchmark yield curve.

✅ 3. Capital Market

📌 What it is:

A platform for raising long-term funds through the buying and selling of stocks (equity) and
bonds (debt).

🔍 Key Institutions:

 Dhaka Stock Exchange (DSE)

 Chittagong Stock Exchange (CSE)
 Bangladesh Securities and Exchange Commission (BSEC)

🎯 Purpose:

To help businesses raise funds and provide investment opportunities to the public.

✅ 4. Foreign Exchange Market

📌 What it is:

A global decentralized market for buying and selling foreign currencies (like USD, EUR, GBP)
using Bangladeshi Taka (BDT).

🔍 Key Participants:

 Commercial banks
 Bangladesh Bank
 Money changers
 Importers/exporters

🎯 Purpose:
To facilitate international trade, remittances, and foreign investments.

📊 Comparison Table

Market Type Time Frame Main Purpose Key Instruments Regulated By

Short-term Liquidity T-bills, call money,

Money Market Bangladesh Bank
(<1 yr) management REPO

Taka Bond Long-term Govt. funding through Treasury Bonds (2–20 Bangladesh Bank,
Market (>1 yr) bonds yrs) MoF

Business financing, Shares, corporate

Capital Market Long-term BSEC, DSE, CSE
investment bonds

Foreign Exchange Short to Currency conversion USD/BDT, EUR/BDT, Bangladesh Bank,

Market variable & trade remittances Banks
🧾 Comparison: Bank vs. Non-Banking Financial Institution (NBFI)
Non-Banking Financial Institution
Criteria Bank
(NBFI)

Accepts deposits and provides loans; Provides financial services without

Primary Function
serves as a financial intermediary. accepting demand deposits.

Regulated by the Central Bank under a

Regulatory Directly regulated by the Central
separate NBFI framework or
Authority Bank (e.g., Bangladesh Bank).
department.

Typically focuses on specialized

Broad lending scope: retail, SME,
Loan Portfolio lending: leasing, housing finance, SME
corporate, housing, etc.
support.

Access to Payment ✅ Full access to national payment ❌ Limited or no access to core

Systems systems and clearinghouses. payment systems.

Active tool for monetary

Monetary Policy Passive role; not directly involved in
transmission (e.g., CRR, SLR, repo,
Role monetary policy execution.
reverse repo).

Eligible for central bank liquidity Generally not eligible for emergency
Liquidity Facilities
support (lender of last resort). central bank funding.

Systemic High; integral to financial system Moderate; plays a supplementary role

Importance stability. in financial services.

Lower systemic risk but exposed to

Risk Exposure High systemic and credit risk.
market and credit concentration risks.

Examples BRAC Bank, Sonali Bank, Dutch- IDLC Finance, LankaBangla Finance,
(Bangladesh) Bangla Bank Delta Brac Housing (DBH)
 CAMELS RATING
1. WHAT IS CAMELS rating and it’s components
2. Explain camels as a bank’s rating system
3. Mentioned the procedure for calculating the composite rating using a hypothetical
example
4. Explain the implications of different composition rating under camels rating analysis
5.

Procedure for Calculating Composite Rating

Composite rating is typically used in financial analysis, credit risk evaluation, performance
benchmarking, etc., to synthesize multiple indicators into a single score.

Step-by-Step Procedure:
 1. Identify Key Indicators (Variables):
Select relevant performance indicators or metrics (e.g., profitability, liquidity, leverage,
efficiency).
2. Assign Weights to Each Indicator:
Determine the relative importance of each indicator. The total weight should equal 100%
or 1.0.
3. Score Each Indicator for the Entity:
Assign a numerical score to each indicator for the entity being rated (e.g., on a scale of
1–10 or 1–100).
4. Normalize Scores (if required):
Convert all metrics to a common scale if they differ (e.g., percentages vs. ratios).
5. Multiply Scores by Weights:
Calculate the weighted score for each indicator.
6. Aggregate the Weighted Scores:
Sum all weighted scores to get the Composite Rating.

🧮 Hypothetical Example

Let’s say we are evaluating a company's financial health using 4 indicators:

Indicator Weight (%) Score (Out of 10) Weighted Score

Profitability 30% 8 0.30 × 8 = 2.4

Liquidity 25% 6 0.25 × 6 = 1.5

Leverage 20% 5 0.20 × 5 = 1.0

Operational Efficiency 25% 7 0.25 × 7 = 1.75

✅ Composite Rating = 2.4 + 1.5 + 1.0 + 1.75 = 6.65 (out of 10)

📊 Interpretation (Based on Thresholds):

Composite Score Rating Category

8.0 – 10.0 Excellent

6.0 – 7.9 Good

4.0 – 5.9 Moderate

Below 4.0 Poor

In our example, a score of 6.65 categorizes the company as Good.

 PRUDENTIAL

1. What is corporate governance of banks

2. How can you ascertain good governance of bank management in accordance with the
guideline of Bangladesh bank?
3. What should be the personal attributes of successful bank director as asked by Bangladesh
bank
4. EXPLAIN the basis of loan classification
5. Process of loan rescheduling and down payment
6. Why the banks are supposed to keep provisions against loan ? write down the general and
specific provisions that bank will be required to maintain
7. What is the basis for loan classification for continuous loan as per b.b
8. What are the prudential norms prescribed by Bangladesh bank while sanctioning a new
loan
9. Policies for writing off loan which must be followed as compliance
10. What are the guideline provided by Bangladesh for considering application for loan
rescheduling
11. Guideline provided by Bangladesh bank to maintain provision

What is corporate governance of banks

Corporate Governance of Banks, as defined by Bangladesh Bank in the Prudential Regulation

for Banks (April 2024), refers to a structured system of rules, practices, and processes through
which a bank’s operations are directed and controlled to safeguard the interest of depositors,
shareholders, and the financial system as a whole.

🔷 Key Components of Corporate Governance in Banks:

1. Board Structure & Members

 The board includes shareholder, nominated, and independent directors.

 Up to 20 directors allowed; at least 2–3 must be independent.
 Directors must meet certain qualifications, with limits on how long they can serve.

2. Roles & Responsibilities

 The board sets strategy and policies, not involved in daily operations.
 The chairman leads the board but does not manage the bank.
 The CEO runs daily operations with oversight from the board.
  Committees (like Audit, Risk, Executive) support good governance.

3. Ethics & Transparency

 Directors must have a clean legal and financial background.

 Banks must follow policies on conduct, conflict of interest, internal control, and risk.

4. Following the Rules

 Banks must follow the Bank Company Act 1991 and Bangladesh Bank rules.
 Bangladesh Bank can approve or remove board members or the CEO if needed for public
interest.

5. Protecting Stakeholders

 Independent directors look out for depositors and the public.

 The audit committee ensures proper controls and transparency in financial reporting.

How can you ascertain good governance of bank

management in accordance with the guideline of Bangladesh
bank?
To ascertain good governance of bank management in accordance with the Bangladesh
Bank's Prudential Regulation (April 2024), you must evaluate whether a bank is operating
under a well-defined, compliant, and transparent governance framework. The following pillars
outline how to identify and verify good governance practices in bank management:

✅ 1. Composition and Qualification of the Board

 The board must include shareholder, nominated, and independent directors.

 Independent directors should be experienced, not involved in the bank’s business, and
have no conflicts of interest.
 All directors must:
o Have at least 10 years of experience.
o Be free from loan defaults, fraud, or legal issues.
✅ 2. Defined Roles and Non-Interference

 The Board sets policies and long-term goals, but does not manage daily operations.
 The CEO runs day-to-day tasks and must act in the bank’s and depositors' best interest.
 The Chairman only has a supervisory role—not involved in executive decisions..

✅ 3. Functioning Board Committees

 Every bank must have three key board committees:

o Executive Committee – handles urgent matters between board meetings.
o Audit Committee – ensures financial transparency and internal control.
o Risk Management Committee – monitors and mitigates operational, credit, and
market risks.
 Each committee must hold at least 4 meetings annually, maintain minutes, and report to
the full board.

✅ 4. Strategic Planning & Performance Monitoring

 The board sets yearly goals and reviews progress every quarter.
 Performance of the CEO and senior managers must be regularly evaluated and published
in the Annual Report.

✅ 5. Robust Internal Control & Audit Systems

 Internal audit must be independent and report directly to the Audit Committee.
 The committee reviews audit findings and makes sure corrections are applied.

✅ 6. Regulatory and Legal Compliance

 Governance effectiveness depends on timely and accurate compliance with:

o Bangladesh Bank circulars
o Basel norms
o AML/CFT regulations
o Other applicable banking laws
 Non-compliance must be recorded, reported, and acted upon.
✅ 7. Human Resource Governance

 The board approves HR policies (hiring, promotion, training) but does not manage staff
directly.

 Special focus on training, ethics, and digital systems.

✅ 8. Ethical Culture and Integrity Policy

 strong Code of Conduct is required.

 All staff and directors must follow policies on honesty, fairness, and avoiding conflicts of
interest.
What should be the personal attributes of successful bank
director as asked by Bangladesh bank
Requirement Standard

Professional Minimum 10 years in management, business, or a professional field

Experience (excluding experience before age 18).

Minimum Age 30 years

Clean Record No criminal conviction, fraud, financial crime, or negative court rulings

Regulatory
No violation of financial laws or regulations
Compliance

Association
No links with failed or deregistered firms
Restrictions

Creditworthiness Not a loan defaulter (personally or through related entities)

Cannot serve as director/advisor/auditor in another bank or financial

Conflict of Interest
institution

Financial Solvency Must not be declared insolvent or tax defaulter

Cooling-off for
5 years must pass after leaving a bank job before joining its board
Employees

5-year ban after removal from the willful defaulter list (as per Finance
Willful Defaulter Ban
Company Act, 2023)

Managing Director/Chief Executive Officer (MD/CEO): Commanding

Excellence in Bank Leadership
 Category Requirements
Moral & Ethical - No criminal records or financial misconduct- Not linked with failed
Integrity banks- Clean inspection reports from BB
Financial - No loan or tax defaults- No history of bankruptcy- No compromise
Credibility settlements with creditors
Education & - Postgraduate degree required- Preferred: Economics, Finance, Banking,
Qualifications Accounting, or Business Admin- IT skills prioritized for digital banks
Professional - Minimum 20 years in banking- At least 2 years just below CEO level-
Experience No prior removal due to misconduct
- No outside directorships or profit-driven roles- No business conflicts or
Conflict of Interest
related-party links
Age Limit - Must be 45–65 years old at time of appointment
- Title: "Managing Director or Chief Executive Officer"- Foreign banks
Designation
may adjust per HQ, with regulatory alignment
- 3-year term, renewable if age-eligible and performance approved by
Tenure
Bangladesh Bank
Process of loan rescheduling and down payment?
Topic What It Means
- Loans made through fraud, forgery, or fund misuse cannot be
rescheduled.
Eligibility Check
- Regular defaulters or bad loans aren’t allowed either.
- The bank must check the borrower's income, repayment ability,
Borrower Check
cash flow, other debts, and visit their place if needed.
- No Bangladesh Bank (BB) approval unless it’s a big or director-
related loan.

Approval Needed - A higher officer must approve it.

- 3rd/4th reschedule needs board approval (except for small

businesses and farms).
- A bad loan can be rescheduled up to 3 times.
Reschedule Limit
- A 4th time is only allowed in special cases.
- After rescheduling, borrowers can get new loans if they:
Getting New Loans - - Pay 3% of the settled amount (2% for exporters)
- - Get a clearance letter (NOC) from their previous bank.

✅ Down Payment Requirement & Time Limit

Outstanding 1st/2nd Time Rescheduling Down Max Time

Loan Type
Amount Payment Limit
7.0% of overdue OR 4.5% of total
Term Loan < Tk 100 crore 6 years
(lower)
Tk 100–500 crore 6.0% OR 3.5% (lower) 7 years
≥ Tk 500 crore 5.0% OR 2.5% (lower) 8 years
Continuous & Demand
< Tk 50 crore 4.0% of total loan 5 years
Loan
Tk 50–300 crore 3.0% (not less than Tk 2 crore) 6 years
≥ Tk 300 crore 2.5% (not less than Tk 9 crore) 7 years
🔁 For 3rd and 4th time rescheduling:

 Down payment must be 1% higher, and

 Maximum time limit is 1 year shorter than previous.

🔄 Other Key Points

 Short-term Agri/Cottage/Micro Credit:

o 1st time: Max 3 years
o 2nd time or more: Max 2.5 years
 During Rescheduled Period:
o Payments must be made in equal monthly/quarterly installments
o If borrower defaults on 6 monthly or 2 quarterly installments, loan becomes
Bad/Loss classified
 Interest: Accrued interest can’t be recognized as income until actually realized.

What are the prudential norms prescribed by Bangladesh

bank while sanctioning a new loan
✅ Prudential Norms for Sanctioning New Loans

Area Prudential Requirement

Banks must not provide new loans to defaulted borrowers without prior
Default Status
approval from BB.
No loan can be sanctioned to a group where any member is a willful
Willful Defaulters
defaulter unless prior BB approval is obtained.
Verification of Banks must verify borrowers’ financial statements through ICAB’s
Financials Document Verification System (DVS).
Execution of Loan must be disbursed only after execution of proper charge documents
Documents and verifying borrower signatures and thumb impressions with NID data.
For loans above Tk 1 crore, valuation must be done by BB-enlisted
Collateral
surveyor firms. For loans ≥ Tk 100 crore, two valuations are required (one
Valuation
from Group-A).
Loans to directors or affiliated entities require board approval and BB's
Loan to Related
prior consent if amount exceeds certain limits (Tk 50 lakh funded or Tk 1
Parties
crore combined).
Audited Financial For Public Interest Organizations and other applicable institutions, audited
Statements financials must be preserved in the loan file.
🔍 Additional Guidelines:

 DVS Use: Ensures authenticity of audited financial statements to prevent manipulation.

 Disqualified Entities: Borrowers involved in fraud, misrepresentation, or fund diversion
are strictly prohibited.
 Legal Compliance: Sanctioning must comply with the Banking Companies Act, BB
circulars, and internal credit policies.

Policies for writing off loan which must be followed as compliance

Loan write-off is when a bank decides a loan is so bad that it’s no longer worth keeping in the
account as "recoverable." So, it’s removed from the balance sheet — but the bank can still try
to recover the money.

Here is a simple explanation of the loan write-off policies that banks must follow as per
Bangladesh Bank's Prudential Regulation for Banks (April 2024):

✅ Loan Write-Off Policies (in Simple Terms)

1. Eligibility for Write-Off:

o A loan must be classified as ‘Bad/Loss’.
o The loan must have no realistic chance of recovery, even after all efforts.
2. Minimum Time Condition:
o The loan must remain in the 'Bad/Loss' category for at least 3 years before it can
be written off.
o However, if 100% loan loss provision is kept and legal action has been taken,
then it can be written off before 3 years.
3. Necessary Conditions:
o Full provisioning (100%) must be done before writing off the loan.
o Legal actions must be initiated against the borrower unless:
 The borrower is untraceable, or
 Death or special humanitarian cases justify exemption.
4. Approval & Responsibility:
o Write-off decision must be approved by the bank’s board of directors.
o The responsibility lies with the bank’s top management and audit committee to
ensure compliance and proper documentation.
5. Not a Waiver:
o Write-off does not mean waiver. The bank must still try to recover the amount
through legal or other means.
6. Record Keeping:
o All write-offs must be clearly recorded in a separate ledger, and recovery
attempts must be documented.
o Banks must maintain a watch list of written-off loans for follow-up and reporting.
7. Reporting to Bangladesh Bank:
 o Banks must report all write-offs quarterly to Bangladesh Bank in the prescribed
format.

🔍 Key Point:

Even if a loan is written off, the bank is still required to keep trying to recover it. It is only
removed from the balance sheet—not from responsibility.

What are the guideline provided by Bangladesh for considering

application for loan rescheduling
✅ Guidelines for Considering Loan Rescheduling Applications

Requirement Explanation

Genuine Reason The borrower must have genuine financial difficulty, not caused by
Required fraud, fund diversion, or habitual defaulting.

- The loan is affected by fraud or forgery.

Not Eligible If - The borrower has diverted loan funds.
- The borrower is a habitual defaulter.

Bank must thoroughly assess:

- Business performance
Assessment of Borrower - Cash flow
- Repayment capacity
- Liabilities with other banks/FIs.

The bank must conduct an on-site inspection of the borrower’s

On-site Inspection
business/project before approving rescheduling.

Verification of Required documents must be collected and verified for authenticity

Documents (e.g., income, balance sheets, cash flow).

Past behavior regarding loan repayment and use must be evaluated

Prior Loan Conduct
carefully.

Approval Authority - Rescheduling must be approved by one level higher than the
original sanctioning authority.
 Requirement Explanation

- For 3rd or 4th rescheduling, approval must come from the Board of
Directors.

Bangladesh Bank - Required only for large loans or if the borrower is a director/related
Permission party.

Borrower must pay a required down payment based on loan type and
Down Payment
size (e.g., 2.5% to 7%).

Limit on Rescheduling A loan can be rescheduled maximum three times; a fourth time
Frequency requires strong justification and must support recovery.

The bank must keep all supporting documents, analysis reports, and
Documentation
board/committee approvals.

🔍 Key Principle:

Loan rescheduling is allowed only when it supports realistic recovery, and banks must avoid
rescheduling to hide bad loans or artificially improve financial reports.

Interest waiver
✅ Detailed Summary: Policy 128 – Interest Waiver Guidelines

Policy 128 provides clear operational and compliance frameworks for banks (including Islamic
Shariah-based banks) when considering interest waivers on loans and written-off assets. The
policy ensures that interest waivers are provided judiciously, based on financial integrity, due
diligence, and regulatory alignment.

An interest waiver is when a bank or financial institution forgives or cancels the interest that a
borrower was supposed to pay on a loan, either fully or partially.

🔒 1. Principal Waiver
  Not Allowed: The principal amount of any loan cannot be waived under any
circumstances.

💸 2. Interest Waiver (Profit Waiver for Islamic Banks)

 Permitted in Genuine Cases: Banks can waive interest only if the borrower's financial
hardship is proven.
 Restricted in Certain Cases:
o If the loan was created through fraud or forgery.
o If the borrower is a willful defaulter.
o If the borrower’s net profit after tax is positive in the last 3 years.
o If the borrower’s owner's equity (per latest audited statement) is positive.

📝 3. Approval Authority

 All interest waiver proposals must be approved by the Board of Directors.

 Exception: If the original loan amount was ≤ BDT 10 lakhs, the board may delegate
approval authority to bank management.

💰 4. Cost of Fund Recovery Requirement

 The bank must recover its cost of funds before approving an interest waiver.
 Cost recovery is not mandatory only in the following cases:
o Project has been closed for at least 3 years.
o Collateral and personal asset sales are insufficient.
o Legal actions or recovery measures have failed.
o Borrower is deceased or unable to repay due to:
 Natural disasters
 Epidemics or pestilence
 Floods
 Other crisis situations

🕵️‍♂️5. Internal Audit Review

 If the cost of fund recovery is not possible, the Internal Audit Department must:
 o Review and validate the reasons.
o Obtain an official opinion from the Head of Internal Control & Compliance
(HICC).

🏛️6. Special Rules for State-Owned & Specialized Banks

 Interest cannot be waived by debiting the bank’s income account.

 All government-issued instructions on interest waiver must be followed strictly.

📊 7. Financial Impact Assessment

Before approving interest waivers, banks must assess their own:

 Capital adequacy
 Profitability
 Other critical financial indicators

👨‍⚖️8. Interest Waiver for Bank Directors/Related Parties

 If the borrower is a director, their family, or an associated institution, banks must

comply with:
o Section 28 of the Bank Company Act, 1991
o This ensures there’s no conflict of interest or abuse of authority.

Categories of Loans and Advances:

Types of Loans (Made Simple)

a) Continuous Loan

 Ongoing loans with a set limit and an expiry date.

 You can deposit and withdraw anytime within the limit.
 Examples: Cash Credit, Overdraft.

b) Demand Loan
  Loans that must be repaid whenever the bank asks.
 Also includes loans that started without formal approval (forced loans).
 Examples: Post-Import Finance, Payment Against Document, Bill Purchase.

c) Fixed Term Loan

 Loans that have to be paid back in fixed installments over a set time.
 Example: Personal loans, car loans with monthly payments.

d) Short-term Agricultural Credit

 Loans for farmers, usually to be paid back within 12 months.

 Follows the rules set by Bangladesh Bank's agricultural credit policy.

EXPLAIN the basis of loan classification

Basis of Loan Classification (How Loans Are Categorized)

Loan classification is a way for banks to identify the risk level of loans. It is done using two
main methods:

1️⃣ Objective Criteria (Based on Due Dates)

Loans are classified based on how many days the payment is overdue:

Category Overdue Period Status

STD-0 No overdue Good (Standard)
STD-1 1 day to less than 1 month Still acceptable
STD-2 1–2 months overdue Early warning
SMA 2–3 months overdue Needs attention
SS (Sub-Standard) 3–6 months overdue Problematic loan
DF (Doubtful) 6–12 months overdue High risk
B/L (Bad/Loss) Over 12 months overdue Almost unrecoverable

SS, DF, and B/L loans are considered Non-Performing Loans (NPL).

2️⃣ Qualitative Judgment (Based on Risk Factors)

Even if a borrower pays on time, a loan can still be classified as risky if:

 The business is losing money

 Cash flow is poor
 There are legal issues
 Management is weak or dishonest
 The bank didn’t follow proper procedures when giving the loan

In these cases, the bank uses judgment based on signs of risk.

🛠 Final Classification

 The worst status between the two methods (objective and qualitative) is used.
 Example: If a loan is 2 months overdue (SMA) but the borrower is clearly failing, it can
be marked as Sub-Standard or worse.

🔁 Upgrading Loan Status

A loan can be moved to a better status only if:

 The overdue amount is paid back (for overdue loans), or

 The borrower’s financial situation improves (for judgment-based loans)
 In some cases, approval is needed from the bank’s top management or Bangladesh Bank

12. Why the banks are supposed to keep provisions against loan ?
write down the general and specific provisions that bank will be
required to maintain
🏦 Why Banks Must Keep Provisions Against Loans

Banks are required to keep loan loss provisions to:

1. Cover potential losses from borrowers who may not repay.

2. Ensure financial stability and build a cushion against bad debts.
3. Protect depositors' money and the bank's financial health.
4. Comply with Bangladesh Bank regulations and international standards (like IFRS 9).
5. Build investor and customer confidence through strong risk management.
These provisions act like a "safety net" in case some loans turn bad or become non-performing.

📊 Types of Provisions Banks Must Maintain

✅ General Provision

For loans that are not yet classified as non-performing (STD-0, STD-1, STD-2, and SMA):

Loan Status Provision Rate

STD-0 1% of outstanding loan

STD-1 1%

STD-2 1%

SMA 5%

⚠️Specific Provision

For loans that are classified as non-performing (NPLs):

Loan Classification Provision Rate

Sub-Standard (SS) 20% of the adjusted loan balance

Doubtful (DF) 50%

Bad/Loss (B/L) 100%

Note: These percentages apply after deducting any eligible collateral and interest suspense.
 GENERALIZED QUESTIONS

1. WHICH parties engaged in money creation process? Concise overview of

how money is created and constraints it faces?
2. B.b as a lender of last resort? Provide an example
3. What are the key roles of central banks
4. Monetary and financial stability both are consider very important mandate
for central banks
5. Difference between capital and reserve requirements
6. Money creation process and its limits
7. Which parties are engaged in money creation process
8. Bangladesh bank role as bank supervisor and give an example
9. DEFINE CENTRAL BANK ? DIFFERNECE BETWEEN CENTAL
AND COMMERCIAL BANK
10. What are the key roles of central banks
11.

What is Money Creation?

Money creation is the process by which the total amount of money in an economy increases. It
mainly happens through banks when they give out loans.

🔁 Step-by-Step: How Money is Created

1. Central Bank Creates Base Money

 The central bank (like Bangladesh Bank) prints physical money and also creates digital
money.
 This money is given to commercial banks or used to buy government bonds.

2. Commercial Banks Lend Money

 People deposit their money into banks.

 Banks don’t keep all of it—they only keep a small part (called reserve) and lend the rest
out.

3. Loans Become New Deposits

 The money banks lend is usually spent, and the person who gets paid deposits that
money into another bank.
 That bank then lends out most of that money again.
  This process repeats again and again.

4. Money Multiplies

 Even though the original cash hasn’t changed much, the total money in bank accounts
increases.
 This is called the money multiplier effect.

🧠 Example

Let’s say:

 You deposit Tk. 1,000

 The bank keeps Tk. 100 (10% reserve)
 It lends out Tk. 900
 That Tk. 900 is deposited elsewhere and the cycle continues

Eventually, the system can create up to Tk. 10,000 from your original Tk. 1,000!

⚠️Important Note

Too much money creation can cause inflation. So the central bank watches this process closely
and adjusts interest rates and rules as needed.
📊 Money Supply vs Reserve Requirement vs Policy Interest Rate
Controlled Effect on Money
Indicator Definition Effect on Economy
By Supply
Total amount of More money = more
Indirectly by N/A (it's the result of
Money Supply money in circulation spending, less money =
Central Bank monetary tools)
and in bank deposits slower economy
% of deposits banks ↑ Reserve = ↓
Reserve Tightens or loosens credit
must keep and not Central Bank Lending = ↓ Money
Requirement availability
lend out Supply
The interest rate set
High rate = less
Policy Interest by the central bank ↑ Rate = ↓ Borrowing
Central Bank borrowing/spending; low
Rate for lending to = ↓ Money Supply
rate = more
commercial banks

🔁 Summary of Relationships

 Higher reserve requirement → Less money creation → Lower money supply

 Higher policy rate → Costly loans → Less borrowing → Lower money supply
 Lower rates/reserves → More loans → Higher money supply

What is a Central Bank?

A central bank is the primary monetary authority of a country. It regulates the banking
system, manages the nation’s currency, sets interest rates, and ensures overall financial stability.
Examples include Bangladesh Bank, Federal Reserve (USA), and European Central Bank.

Key Functions of a Central Bank:

 Issues national currency

 Sets monetary policy (e.g., interest rates, inflation control)
 Supervises commercial banks
 Acts as a lender of last resort
 Maintains foreign exchange reserves
 Manages government accounts and debt
Difference Between Central Bank and Commercial Bank:

Feature Central Bank Commercial Bank

Regulates and oversees the financial Provides banking services to the
Primary Role
system public
Customers Government, other banks Individuals, businesses
Currency
Yes (monopoly right) No
Issuance
Profit Motive Not profit-oriented Profit-oriented
Deposits Accepted Only from banks or government From the general public
Example Bangladesh Bank Sonali Bank, BRAC Bank, HSBC

Reserve Requirement vs Policy Interest Rate

Aspect Reserve Requirement Policy Interest Rate

Minimum percentage of deposits Interest rate set by central bank for

Definition
banks must hold in reserve lending to commercial banks

Control credit expansion by limiting Influence borrowing costs and overall

Primary Objective
loanable funds demand in the economy

Quantitative – affects the money Price-based – affects cost of credit

Type of Tool
supply directly indirectly

Reduces or increases the amount Makes loans cheaper or more

Impact on Banks
banks can lend expensive for banks and customers

Money Supply ↑ Reserve = ↓ Lending = ↓ Money ↑ Rate = ↓ Borrowing = ↓ Money

Effect Supply Supply

Rarely changed due to its strong Adjusted more frequently for fine-
Usage Frequency
disruptive impact tuning monetary policy

Example
BB may set a 10% reserve ratio BB may set a 6% repo rate
(Bangladesh)

Limitations on the Money Creation Process

1. Reserve Requirements:
Central banks set a minimum reserve ratio, limiting how much money banks can lend out
from deposits.
2. Public Demand for Cash:
If people prefer holding cash instead of deposits, banks have fewer funds to lend,
reducing money creation.
3. Willingness to Lend and Borrow:
If banks are cautious about lending or borrowers are unwilling to take loans (e.g., during
economic uncertainty), the process slows down.
4. Monetary Policy Controls:
Central banks can tighten money supply through interest rate hikes or open market
operations, directly limiting credit expansion.
5. Regulatory Constraints:
Capital adequacy norms, risk-weighted assets, and other prudential guidelines restrict
excessive lending.
6. Leakages in the Banking System:
Money that exits the formal banking channel (e.g., informal lending, unbanked savings)
doesn't contribute to further deposit creation.

BASEL
Measurement of Risk-weighted Assets (RWA)
To calculate the Capital to Risk-weighted Asset Ratio (CRAR), banks need to measure their total
risk. This includes:

 Credit Risk
 Market Risk
 Operational Risk

The total RWA is calculated by:

1. Taking the capital charges for market and operational risks.

2. Dividing each by the minimum CRAR (currently 10%).
3. Adding those amounts to the credit risk-weighted assets.

This gives the total RWA, which is then used to assess whether the bank has enough capital to
cover its risks.

Penalty for Non-Compliance

 If a bank fails to maintain the minimum capital or CRAR on time, Bangladesh Bank
(BB) may impose business restrictions, financial penalties, or other actions as per
Section 13(7) of the Bank Company Act 1991 (amended up to 2013).
 If any bank employee knowingly provides false information to BB, it is considered a
punishable offense under Section 109(2) of the same Act.
 If a bank does not submit the RBCA report on time without a valid reason, BB may
impose a penalty as per Section 109(7).

Tier 2 Capital (also known as supplementary capital) refers to the second layer of a bank's
capital under regulatory frameworks like Basel III. It is used to absorb losses in the event of a
bank winding up and provides additional financial strength, though it's considered less secure
than Tier 1 capital.

Leverage Ratio – Simplified Overview

To prevent banks from taking on too much risk through excessive borrowing (both on and off the
balance sheet), a simple and transparent leverage ratio has been introduced.

Key Points:

 This ratio is not based on risk, making it easy to understand.

 It works as a back-up control alongside risk-based capital rules.
Main Objectives:

a) Limit excessive leverage in banks, which could harm the financial system and economy.
b) Support risk-based requirements with a straightforward, non-risk-based measure.

Regulatory Requirement:

 Banks must maintain a minimum Tier 1 leverage ratio of 3% at both individual (solo)
and group (consolidated) levels.
 The leverage ratio must be calculated and reported quarterly, using the average of
month-end ratios during the quarter, based on defined capital and total exposure values.
Sure, here’s a simplified version of that statement with a professional tone:

Banks must keep a certain amount of capital based on the credit risk of their assets. This risk is
measured using credit ratings from agencies approved by Bangladesh Bank (BB). Every asset,
whether on or off the balance sheet, is given a risk weight. These weights depend on the credit
rating or are set by BB if no rating is available.