Central Bank, its functions and Relationship with Commercial Banks

Structure of Financial System in Bangladesh

The Financial System of Bangladesh is comprised of three broad fragmented sectors: Formal Sector Semi-Formal Sector Informal Sector

Financial System of Bangladesh

Formal Sector Semi Formal Sector Informal Sector

Financial Market

Regulators & Institutions

Specialized Financial Institutions

House Building Finance Corporation (HBFC)

Money Market (Banks, NBFI, Primary Dealers)

Palli Karma Sahayak Foundation Bangladesh Bank (Central Bank) Samabay Bank 47 Scheduled & 4 non scheduled Banks +9 proposed new banks Grameen Bank

Capital Market (Investment Banks, Stock Exchange, Credit Rating Companies

31 NBFIs Foreign Exchange Market (Authorized Dealers) Insurance Development & Regulatory Authority

18 Life & 44 Non life Insurance Companies

Securities & Exchange Commission (Regulator of Capital Market Intermediaries)

Stock Exchanges, Stock Dealers, Brokers, Marchant Banks, AMCs, Credit Rating Agencies

Micro Credit Regulatory Authority ( MFI Authority ) Micro Finance Institutions - 599 MFIs

Major Acts, Laws & Regulations for Regulating Monetary and Financial system
Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972) Bank Company Act, 1991 The Negotiable Instruments Act, 1881 The Bankers Book Evidence Act, 1891 Foreign Exchange Regulations Act, 1947 Financial Institutions Act, 1993 Bank Deposit Insurance Act, 2000 Money Loan Court Act, 2003 Micro Credit Regulatory Authority Act, 2006 Money Laundering Prevention Act,2012 Anti-terrorism Act, 2009 and Anti Terrorism (Amendment) Act,2012

Concept & Evaluation of Central Banks

A central bank is a bank which constitutes the apex of the monetary and banking structure. It is the lender of the last resort and has monopoly in Banknote-issue The first central bank in economic literature is known to be the Riksbank of Sweden establish in 1668 from the remains of the failed bank Stockholms Banco in 1664. This was followed by the establishment of the Bank of England (1694), Banque de France (1800), Bank of Japan (1882), Federal Reserve System (1914), Reserve Bank of India (1935), State Bank of Pakistan (1948) and Bangladesh Bank (1972).

Central Bank in Subcontinent

History of Banking System in Bangladesh

1. Banking system in pre-independent Bangladesh 2. Nationalization of the Banking system in Bangladesh 3. Privatization of the Banking system in Bangladesh

Functions of Bangladesh Bank

Formulation and implementation of monetary and credit policies Regulation and supervision of banks and non-bank financial institutions, promotion and development of domestic financial markets Management of the country's international reserves Issuance of Banknotes Regulation and supervision of the payment system Acting as banker to the government Money Laundering Prevention Collection and furnishing of credit information Implementation of the Foreign exchange regulation Act Managing a Deposit Insurance Scheme Acting as banker of the other banks Acting as lender of the last resort [to rescue from bankruptcy] Liaison with international bodies

Governing Authority of Bangladesh Bank

Bangladesh Bank (BB) has sole authority to issue License for Banking Operation According to Bank Company Act -1991, BB has the authority to issue regulation and directives to commercial banks BB has set the purview of all managerial and Operational activities of Banks BB has direct control over the Top Management and Board of Directors of Commercial Bank. BB has the Authority to Control all activities of all commercial banks directly and indirectly Banks are required to report Bangladesh bank regarding all activities in different frequency BB approvals are required to open new branches

Bangladesh Bank and Banking System in Bangladesh

All commercial banks must keep an account with the Central Bank. These balances are used for cheque clearing purposes between banks. Payments for cheques between banks are set off at the Central Banks clearing house. The Central Bank can also demand commercial banks to deposit a certain percentage of their total deposits with the central bank in order to control the money supply The Central Bank is a lender of last resort and will aid commercial banks when needed [like ICB Islami Bank case]. The Central Bank dictates the interest rate that commercial banks can offer by setting the bank rate. This is the interest rate set by the Central Bank and the rate at which commercial banks and the Central Bank do business, e.g. loans offered by the Central Bank to commercial bank A healthy, efficient banking system goes hand-in-hand with a dependable, independent central bank. The activities of both are inextricably intertwined, and the institutions undeniably share a commonality of interests Central bank supervision of commercial banks, helping to assure maintenance of standards and sound banking practices, contributes to the health of the industry and to the trust and confidence upon which banking depends. The safety net contributes to this objective as well.

BB Tools to Control Credit and Inflation through Banking System

Processes Change in CRR & SLR [Currently SLR is 19% including CRR 6%] Marginal Requirement [e. g., HBL-70:30; Car Loan 30: 70] Rationing of credit [Single borrower exposure limit 15% of capital as funded35% of capital as non-funded; large loan ceiling-10% of capital] Direct Action [Restriction impose to lend some sectors, some area, Environment Risk Management] Moral Suasion [Instructions, follow-up, meeting with CEOs etc] Intervention in the FX market to control inflation Setting Interest Rate to control credit and inflation as well Indirectly control in Setting Exchange Rate Open Market Operation i.e. an activity by a central bank to buy or sell government bonds on the open market. Central bank uses them as the primary means of implementing monetary policy Liquidity Support or control excess liquidity through REPO & Reverse REPO

BB helps in Government Borrowing through Primary Dealers (PD)

Primary Dealers, exclusive intermediary to trade government securities were created in 2001 with an ambition of forming an organized conduit of financing the budgetary need of the government Primary Dealers support government for raising fund and contribute to the proliferation of the economy There are 12 Commercial banks and 3 NBIs act as Primary Dealers in Bangladesh There is an Underwriting Obligation for PDs

Primary Dealers in Bangladesh

Underwriting Obligations of PDs

Government Borrowing Tool through PDs

Treasury Bills 91-Day T-bill 182-Day T-bill 364-Day T-bill Treasury Bonds 5Year Bond 10Year Bond 15Year Bond 20Year Bond Yield Range 11.35%-11.56% 11.35%-11.60% 11.38%-11.62% Yield Range 11.40%-12.00% 11.56%-12.10% 11.75% - 12.50% 12.07%-12.50%

REPO and Reverse REPO

Repo is short for Sale & Repurchase Agreement, where one party agrees to sell bonds /bills or other financial instruments to another party, with an agreement to repurchase equivalent securities in the future, under a formal legal agreement. In one transaction both Repo & Reverse Repo (RREPO) occur. Repoing party is cash taker and reverse repoing party is cash provider The interest rate implied by the difference between the sale price and repurchase price is the Repo Rate Current REPO Rate is 7.25% while RREPO rate is 5.25%

Objective of Repo with Bangladesh Bank

Bangladesh Bank has introduced Repurchase agreements (Repo) for banks and financial institutions, as an indirect monetary tool for day-today liquidity management to smoothen temporary and unexpected disturbances in the supply and demand for money. This facility will provide short-term liquidity in the money market against an eligible security without necessitating liquidation of the security

Departments of Bangladesh Bank for supervision both on and off-site Contd.

Agricultural Credit and Financial Inclusion Department Bangladesh Bank Training Academy Equity and Entrepreneurship Fund Unit Foreign Exchange Inspection & Vigilance Department Common Services Department-1 Foreign Exchange Operation Department

Credit Information Bureau Department of Banking Inspection 1

Forex Reserve & Treasury Management Department Investment Promotion & Financing Facility Project Cell Law Department Policy Analysis Unit

Department of Banking Inspection 3 Department of Financial Institutions and Markets Department of Printing and Publications

SME & Special Programs Department

Departments of Bangladesh Bank for supervision both on and Banking Regulation and Policy Department off-site Expenditure Management Department
Bangladesh Financial Intelligence Unit Foreign Exchange Investment Department

Common Services Department-2

Foreign Exchange Policy Department

Debt Management Department Department of Banking Inspection 2

Information Systems Development Department IT Operation & Communication Department

Department of Currency Management and Payment System Department of Off-Site Supervision Deposit Insurance Department

Monetary Policy Department Research Department Statistics Department

Branches of Bangladesh Bank throughout the country

Barisal Chittagong Motijheel Rangpur Sylhet

Bogra Khulna Rajshahi Sadarghat, Dhaka

Required Reporting to BB by Commercial Banks

Reporting Frequency Daily Weekly Weekly & Fortnightly Weekly and Monthly Fortnightly Bimonthly Monthly Quarterly Half Yearly Yearly Others As asked by BB No of Report 9 3 1 4 1 1 75 25 10 7 5 As required CAMELS Rating Data Risk Reporting Interest Rate Structure on Assets and Liabilities Liquidity Structure Credit Status and Asset Quality Capital Adequacy Export-Import Statement Foreign Exchange Position Major Coverage of Reporting Balance Sheet Structure Assets & Liabilities

Total

141

To encourage the overall growth of the priority sector i.e. the sectors which are recognized by the government as prioritized depending upon their economic contribution and/or government interest. To keep a check over the channelization of credit so that credit is not delivered for undesirable or unproductive purposes. To achieve the objective of controlling Inflation as well as Defletion. To boost the economy by facilitating the flow of adequate volume of bank credit to different sectors as per priority. To maintain growth in the Economy.