Point out the major guidelines of Bangladesh Bank’s management of capital of BASEL –II

 A committee of central banks and bank supervisor and regulators from he major industrialized countries (Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Sweden, Switzerland, U.K and USA) that meets every three months at BIS in Basel.

 Objectives of Basel II:

The objectives of Basel II are given below:

1. Should constitute a more comprehensive approach to address banking risks.

2. Appropriately sensitive to degree of risk.

3. Should continue to enhance competitive equality and promote safety and soundness of the financial system.

Three Pillars of Basel II:

1. Minimum Capital Requirement

2. Supervisory Review

3. Market Discipline

Guidelines for Minimum Capital Requirement:

1. Minimum Capital Requirement

2. Assessing Overall Capital Adequacy

3. Disclosure of Information on Bank’s Risk Profile, Capital Adequacy and Risk Management.

 

Capital Base: Regulatory capital is composed of:

• Tier -1 or Core Capital

• Tier-2 or Supplementary Capital

• Tier-3 or Additional Supplementary Capital

 

What is Tier – 1 Capital:

Tier-1 capital or Core Capital comprises of highest quality capital elements:

• Paid up capital/capital deposited with Bangladesh Bank

• Non-repayable share premium account

• Statutory Reserve

• General Reserve

• Retained Earnings

• Minority interest in subsidiaries

• Non-cumulative irredeemable Preference Share

• Dividend Equalization Account

 

What is Tier-2 Capital?

Tier-2 capital or Supplementary Capital represents other elements which fall short of some of the characteristics of the Core Capital but contribute to the overall strength of a bank. Tier-2

capital is for long term.

• General Provision

• Asset Revaluation Reserves

• All other Preference Share

• Perpetual Subordinated Debt

• Exchange Equalization Account

• Revaluation Reserves for Securities

 

What is Tier-3 Capital?

Tier-3 capital of Additional Supplementary Capital consists of short-term subordinated debt

(original/residual maturity less than or equal to five years but greater than or equal to two years) would be solely for the purpose of meeting capital requirement for market risk.

 

Conditions for Maintaining Regulatory Capital:

1. T-2 + T-3 cannot exceed T-1.

2. At least 20% market risk to be supported by T-1.

3. General provisions is limited to maximum 1.25% of Total Risk Weighted Asset (TRWA)

4. Subordinated debt (T-2) shall be limited to maximum 30% of T-1.

5. 50% of asset and security revaluation reserve shall be eligible for T-2.

6. For downside revaluation full amount will be deducted but for upside revaluation only 50%

will be added.

7. T-3 is limited to 250% of T-1 after meeting credit risk.

 

Eligible Regulatory Capital:

1. Following Deductions are to be made from T-1:

a) Book value of Goodwill

b) Provisioning shortfall

c) Deficit on account of revaluation in investment.

2. Eligible T-2 and T-3 will be derived after deducting components, if any, qualified for deduction.

3. Total Eligible Regulatory Capital = (Eligible Tier-1 Capital + Eligible Tier-2 Capital + Eligible

Tier-3 Capital).

 

Minimum Capital Requirement:

• No schedule bank in Bangladesh shall commence and carry on business unless it has minimum

paid up capital/capital deposited with Bangladesh Bank as fixed by Bangladesh Bank.

• Capital Requirement = ≥ 10% with Tier-1 at least 5%.

• TRWA = RWA for Credit Risk + 10 (capital charge for market risk and operational risk).

 

Methodology for Calculating RWA

1. Convert OBSA to BSA by multiplying with the credit conversion factors.

2. Apply Risk Mitigation Technique

3. Multiply each asset and converted OBSA by appropriate R. W. in order to get RWA.

4. Then, sum these RWA and get TRWA.

National Payment Switch Bangladesh

 The Bangladesh Bank has taken initiative to establish National Payment Switch (NPS) in order to facilitate interbank electronic payments originating from different delivery channels e.g. Automated Teller Machines (ATM), Point of Sales (POS), Internet, Mobile Applications, etc. The main objective of NPS is to create a common platform among the existing shared switches already built-up by different private sector operators. NPS will facilitate the expansion of the card based payment networks substantially and promote e-commerce throughout the country. Online payment of Government dues, using cards and account number information through Internet will greatly be enhanced using NPS. Payment Systems Division (PSD), Department of Currency Management and Payment Systems (DCMPS), BB has started the implementation of NPS which is funded by the International Finance Corporation-Bangladesh Investment Climate Fund (IFC-BICF).

What is commercial bank and what are the functions of a commercial bank?

As per Negotiable Instrument Act 1881 and Bank Company Act 1991, “Banker means the accepting, for the purpose of lending or investment, of deposit of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, and order or otherwise”. A commercial bank is a type of financial institution and intermediary. It is a bank that lends money and provides transactional, savings and money market accounts and that accepts time deposits.

Prof. Rozer “the bank which deals with money and money’s worth with a view to earning profit is known as commercial bank”

Prof. Nath, “commercial bank is an intermediary profit making institution”.

The traditional functions of a Commercial bank are to receive deposit from the surplus unit with a condition to repay on demand or otherwise and allowing loans/advances/investment to the

deficit unit. But now-a-days the functions of a commercial bank diversified and acting as a

superstore. So, the functions may be divided into five categories, such as (1) General functions, (2) Functions related to foreign trade and foreign exchange, (3) Agency functions, (4) Welfare functions and (5) Other functions

 

General functions are:

a) Maintain account of the clients,

b) To receive deposits of various types,

c) To make advance/investment against with or without securities, d) To create deposits,

e) To create medium of exchange through cheque, Draft, Pay – order etc. f) To issue guarantees (local)

g) To discount Bills.

 

Functions related to Foreign trade & Foreign exchange:

a) To make correspondent banking with overseas banks,

b) To place foreign currency funds with correspondents abroad, c) To issue Letter of Credit (LC),

d) To issue Back to Back Letter of Credit (BTB L/C),

e) To amend L/Cs,

f) To extend investment/credit facilities to the importers through creating PAD/MIB, MTR/LTR, LIM/LAM/MP etc,

g) To extend credit/investment facilities to the exporters through the modes of Musharaka Pre-

shipment/PC/ECC, LDBP, FDBP etc,

h) Acceptance of Bill of Exchange and make payment,

i) Make forward booking of foreign exchange on behalf of importer for preventing them from exchange loss,

j) Sale and purchase of Foreign currency, TC, Credit Cards, k) Maintaining Foreign Currency accounts,

l) Outward foreign remittance for import, foreign tour, travel, education, treatment, pilgrims, training etc.,

m) Inward foreign remittance – export proceeds, wage earners remittance etc., n) Issuing guarantees (foreign).

 Agency functions:

a) To transfer money,

b) To collect funds and makes payment for the clients, c) To maintain confidentiality of customers,

d) To sale and purchase of shares and securities,

e) To make payments for utility charges and insurance premium on behalf of the client, f) To receive rent, dividend, premium etc.

g) To work as trustee,

h) To work as representative of Central Bank.

 

Welfare functions:

a) Social welfare functions/Corporate Social Responsibility,

b) Functions related to the welfare of the employees/retired employees such as

• Establishment of institution,

• Establishment of Trust,

• Pensions and allowance.

 Other functions:

a) Underwriting,

b) Work as safe custody through Locker service, c) Advices the clients on business matters,

d) Repo,

e) Customer financing, f) Leasing,

g) Income sharing,

Securitization

 Securitization means the conversion of a pool of assets into marketable debt securities. The deal starts with an originator selling a part of his assets portfolio to a body (or a trust) called the Special Purpose Vehicle (SPV) and in effect converting the assets into cash. The special purpose vehicle in turn raises money by floating a debt instrument on the strength of cash flows and the underlying assets, and using the proceeds to pay off the originator. To this extent, the SPV is

only a pass through vehicle and a manager of the asset and cash flow pool. The proceeds collected by the originator on account of the outstanding loans made by him is then passed on

the SPV who in turn pays off the principal and interest to the final investor, typically the wholesale investor, like the mutual funds, insurance companies and pension funds.

Benefits of Securitization:

1. For the issuer, securitization provides an additional source of funds, reduces funding costs, besides resulting in economy in the use of capital, greater recycling of funds which lends to

higher turnover and profitability.

2. It also improves the capital adequacy norm by removing loan assets from the balance sheet,

or by substituting them with less risk weighted assets. Moreover, funds can be managed without impairing its borrowing ability.

3. Securitized assets gives the issuer, the ability to pass on or eliminate credit, interest rate and

lending risks associated with balance sheet funding and hence is an effective means of diversifying credit risk.

4. For the investor, it improves the diversity of investment avenues. It also makes it possible for investing in high yielding assets like housing and consumer finance which are untouchable by banks. Moreover, the investor benefits from the purchase of securitized debt with higher quality

debt with higher yields and good liquidity. Impediments to Assets Securitization in Bangladesh:

1. Lack of Awareness

2. Non Uniformity in Stamp Duty

3. Absence of Effective Foreclosure norms

4. Less demand for long term Debt Papers

5. Investments Restrictions

Discuss the principles of sound lending.

 

a. Safety- security and repaying capacity,

b. Liquidity- ability of an asset to convert in to cash without loss, c. Profitability- brings adequate return for the bank,

d. Purpose- should be productive,

e. Spread- Diversification of advance.

Define loan sale and explain different types of loan sales

 A loan sale is a sale, often by a bank, under contract of all or part of the cash stream from a specific loan, thereby removing the loan from the bank's balance sheet.

Types of Loan Sale:

1. Participation Loans

2. Assignments

3. Loan Strip

1) Participation Loans: a loan that is shared by a group of banks that join to make a loan too big for any one of them alone.

2) Assignments: A sale of loan by bank of rights against the borrower and the benefits of the loan, to the assignee bank.

3) Loan Strip: Loan Strips are short-dated pieces of a longer-term loan and often mature in a few days or weeks. The buyer of a strip is entitled to a fraction of the expected income from a loan.