Identify the indicators of high credit risk and poor credit risk management:

Indicators of High Credit Risk:

1.     High Default Rates: High default rates indicate a higher likelihood of borrowers failing to meet their credit obligations. If a significant number of borrowers are defaulting on their loans or credit agreements, it is an indicator of elevated credit risk.

2.     Non-Performing Loans (NPLs): Non-performing loans refer to loans that are in default or are significantly overdue in terms of payments. A high level of NPLs suggests that borrowers are facing difficulties in repaying their debts, which reflects poor credit quality and higher credit risk.

3.     Deteriorating Financial Ratios: Monitoring the financial ratios of borrowers is crucial in assessing credit risk. If financial ratios such as debt-to-equity ratio, interest coverage ratio, or liquidity ratios deteriorate significantly over time, it indicates a weakened financial position and higher credit risk.

4.     Weak Credit Ratings: Credit ratings assigned by reputable credit rating agencies provide an assessment of the creditworthiness of borrowers. A downgrade in credit ratings or low credit ratings assigned to borrowers suggests higher credit risk.

5.     Poor Payment History: Consistently delayed or missed payments by borrowers indicate an inability to meet financial obligations, which raises credit risk concerns. Frequent late payments or defaults on previous loans are red flags for potential credit risk.

Indicators of Poor Credit Risk Management:

1.      Inadequate Credit Assessment: Poor credit risk management is often characterized by inadequate assessment of borrowers' creditworthiness. Insufficient analysis of borrowers' financial health, repayment capacity, and collateral evaluation can lead to higher credit risk exposure.

2.      Weak Monitoring and Portfolio Management: Inadequate monitoring of borrower behavior and loan portfolios can result in poor credit risk management. Failure to regularly review and update borrower information, assess changes in financial conditions, and adjust credit exposure accordingly increases the risk of defaults.

3.      Lack of Risk Diversification: Concentrated exposure to a few borrowers, industries, or sectors without proper risk diversification is indicative of poor credit risk management. Over-reliance on specific borrowers or sectors can amplify credit risk if adverse developments occur in those concentrated areas.

4.      Insufficient Collateral and Security Measures: Inadequate collateral valuation, weak security measures, or insufficient collateral coverage can increase credit risk. If collateral values are overestimated or collateralization practices are lax, the recovery of funds in case of default becomes more challenging.

5.      Ineffective Credit Policies and Procedures: Poorly defined or inconsistent credit policies and procedures contribute to ineffective credit risk management. Lack of clear guidelines for loan origination, underwriting standards, loan pricing, and credit risk mitigation can lead to higher credit risk exposure.

6.      Inadequate Risk Mitigation Strategies: Failure to implement effective risk mitigation strategies, such as proper loan structuring, loan covenants, and collateral requirements, can lead to weaker credit risk management. Inadequate risk mitigation measures increase the vulnerability to credit losses.

These indicators of high credit risk and poor credit risk management emphasize the importance of robust credit risk assessment, proactive monitoring, diversified portfolios, and sound risk management practices to mitigate credit risk and maintain a healthy lending environment.

Describe the conversions for quoting foreign exchange rates with examples or how exchange rates are quoted in the market. Give examples of direct quotation and indirect quotation methods

 When quoting foreign exchange rates, there are two common conventions used: direct and indirect quotations. These conventions determine the method of expressing the value of one currency in terms of another currency. Let's explore each conversion method with an example:

Direct Quotation: In a direct quotation, the domestic currency is expressed in terms of a fixed amount of the foreign currency. It indicates how much of the foreign currency is needed to purchase one unit of the domestic currency.

Example: Suppose you are in the United States and want to quote the exchange rate between the U.S. dollar (USD) and the Euro (EUR). If the direct quotation is used, and the exchange rate is 1.20 USD/EUR, it means that 1 U.S. dollar is equivalent to 1.20 Euros. In this case, the U.S. dollar is the domestic currency, and the Euro is the foreign currency.

Indirect Quotation: In an indirect quotation, the foreign currency is expressed in terms of a fixed amount of the domestic currency. It indicates how much of the domestic currency is needed to purchase one unit of the foreign currency.

Example: Let's consider the same scenario as above, but this time using an indirect quotation for the exchange rate between the U.S. dollar (USD) and the Euro (EUR). If the indirect quotation is used, and the exchange rate is 0.83 EUR/USD, it means that 1 Euro is equivalent to 0.83 U.S. dollars. In this case, the Euro is the domestic currency, and the U.S. dollar is the foreign currency.

It's important to note that the choice between direct and indirect quotations depends on the market and the currency being quoted. Different countries and currency pairs may have different conventions for quoting exchange rates.

Additionally, some currencies may have a base currency different from the U.S. dollar. In such cases, cross rates are used to calculate the exchange rate between two non-base currencies. Cross rates involve converting two non-base currencies into the base currency and then calculating the exchange rate between them.

Example: Suppose you want to quote the exchange rate between the Euro (EUR) and the Japanese Yen (JPY). If the base currency is the U.S. dollar, and the direct quotations for EUR/USD and USD/JPY are 1.20 and 110, respectively, the cross rate between EUR/JPY can be calculated as follows: 1.20 EUR/USD 110 USD/JPY = 132 JPY/EUR. This means that 1 Euro is equivalent to 132 Japanese Yen.

In summary, direct and indirect quotations are used to express foreign exchange rates. Direct quotations indicate the value of the domestic currency in terms of a fixed amount of the foreign currency, while indirect quotations indicate the value of the foreign currency in terms of a fixed amount of the domestic currency. The choice between direct and indirect quotations depends on the market convention and currency being quoted.

Describe the types of foreign exchange rates with examples. Describe various foreign exchange rates according to the nature of the transaction:

 Some of the major types of foreign exchange rates are as follows:

1. Fixed Exchange Rate System (or Pegged Exchange Rate System).

2. Flexible Exchange Rate System (or Floating Exchange Rate System).

3. Managed Floating Rate System.

 1. Fixed Exchange Rate System:

A fixed exchange rate system refers to a system in which the exchange rate for a currency is fixed by the government.

1. The basic purpose of adopting this system is to ensure stability in foreign trade and capital movements.

2. To achieve stability, the government undertakes to buy foreign currency when the exchange rate becomes weaker and sell foreign currency when the rate of exchange gets stronger.

3. For this, the government has to maintain large reserves of foreign currencies to maintain the exchange rate at the level fixed by it.

4. Under this system, each country keeps the value of its currency fixed in terms of some 'External Standard

5. This external standard can be gold, silver, other precious metals, another country's currency, or even some internationally agreed unit of account.

6. When the value of a domestic currency is tied to the value of another currency, it is known as 'Pegging"

7. When the value of a currency is fixed in terms of some other currency or terms of gold, it is known as the "Parity value of currency

2. Flexible Exchange Rate System:

A flexible exchange rate system refers to a system in which the exchange rate is determined by forces of demand and supply of different currencies in the foreign exchange market.

1.     The value of currency is allowed to fluctuate freely according to changes in demand and supply of foreign exchange.

2.     There is no official (Government) intervention in the foreign exchange market.

3.     Flexible exchange rate is also known as a floating Exchange Rate

4. The exchange rate is determined by the market, i.e. through interactions of thousands of banks, firms and other institutions seeking to buy and sell currency for purposes of making transactions in foreign exchange.

 3. Managed Floating Rate System:

Traditionally, International monetary economists focused their attention on the framework of either a fixed or a Flexible exchange rate system. With the end of Bretton Woods's system, many countries have adopted the method of Managed Floating Exchange Rates

It refers to a system in which the foreign exchange rate is determined by market forces and the central bank influences the exchange rate through intervention in the foreign exchange market.

1. It is a hybrid of a fixed exchange rate and a flexible exchange rate system.

2. In this system, central bank intervenes in the foreign exchange market to restrict the fluctuations in the exchange rate within certain limits. The aim is to keep exchange rate close to desired target values

3. For this, central bank maintains reserves of foreign exchange to ensure that the exchange rate stays within the targeted value.

4. It is also known as "Dirty Floating

 

 

Define exchange rate. What are the reasons for exchange rate fluctuations?

 A foreign exchange rate is the price of the domestic currency stated in terms of another currency. For example, one can exchange US dollars for euros. Forex transactions can be done on the forex market that market, commonly known as the foreign exchange market.

With trillions of dollars traded between hands every day. The money market is the largest and most liquid market in the world. There is no gathering place instead, the forex market is an electronic network of institutions, banks, brokers, and individual traders. (Mainly through brokers or banks).

The market determines the value of most currencies, which is commonly referred to as an exchange rate. One foreign exchange requirement can be met by merely exchanging one currency for another at a nearby bank. Currency trading on the foreign exchange market is an additional choice. For instance, an investor can stake money on the possibility that a central bank will ease or tighten monetary policy as well as the strength of one currency vs. another.

Many factors can potentially influence the market forces behind foreign exchange rates. The factors include various economic, political, and even psychological conditions. The economic factors include a government's economic policies, trade balances, inflation, and economic growth outlook.

Main causes of fluctuations in exchange rates of international payments

1. Trade Movements

2. Capital Movements

3. Stock Exchange Operations

4. Speculative Transactions

5. Banking Operations

6. Monetary Policy

7. Political Conditions

Important among these are:

1. Trade Movements: Any change in imports or exports will certainly cause a change in the rate of exchange. If imports exceed exports, the demand for foreign currency rises, hence the rate of exchange moves against the country. Conversely, if exports exceed imports, the demand for domestic currency rises and the rate of exchange moves in favor of the country.

2. Capital Movements: International capital movements from one country for short periods to avail of the high rate of interest prevailing abroad or for long periods for the purpose of making long-term investment abroad. Any export or import of capital from one country to another will bring about a change in

3. Stock Exchange Operations: These include granting of loans, payment of interest on foreign loans, repatriation of foreign capital, purchase and sale of foreign securities e c., which influence demand for foreign funds and through it the exchange rates.

For instance, when a loan is given by the home country to a foreign nation, the demand for foreign money increases and the rate of exchange tends to move unfavorably for the home country. But, when foreigners repay their loan, the demand for home currency exceeds its supply and the rate of exchange becomes favorable.

4. Speculative Transactions: These include transactions ranging from anticipation of seasonal movements in exchange rates to the extreme one, viz., flight of capital. In periods of political uncertainty, there is heavy speculation in foreign money. There is a scramble for purchasing certain currencies and some currencies are unloaded. Thus, speculative activities bring about wide fluctuations in exchange rates.

5. Banking Operations: Banks are the major dealers in foreign exchange. They sell drafts, transfer funds, issue letters of credit, accept foreign bills of exchange, take up arbitrage, etc. These operations influence the demand for and supply of foreign exchange, and hence the exchange rates.

6. Monetary Policy: An expansionist monetary policy has generally an inflationary impact, while a constructionist policy tends to have a deflationary inflation. Inflation and deflation bring about a change in the internal value of money. This reflects in a similar change in the external value of money. Inflation means a rise in the domestic price level, fall in the internal purchasing power of money, and hence a fall in the exchange rate.

7. Political Conditions: Political stability of a country can help very much to maintain a high exchange rate for its currency: for it attracts foreign capital which causes the foreign exchange rate to move in its favour. Political instability, on the other hand, causes a panic flight of capital from the country hence the home currency depreciates in the eyes of foreigners and consequently, its exchange value falls.

8. Inflation Rates: Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation rate than another's will see an appreciation in the value of its currency. The prices of goods and services increase at a slower rate where the inflation is low. A country with a consistently lower inflation rate exhibits a rising currency value while a country with higher inflation typically sees depreciation in its currency and is usually accompanied by higher interest rates.

In fact, there are various factors which affect or influence the demand for and supply of foreign currency (or mutual demand for each other's currencies) which are ultimately responsible for the short-term fluctuations in the exchange rate.

A Balance Sheet is described as a 'Snapshot of a company's financial position as on a particular date, Do you agree

 Yes, I agree with the statement that a balance sheet is often described as a "snapshot of a company's financial position as on a particular date." A balance sheet provides a summary of a company's assets, liabilities, and shareholders' equity at a specific point in time, typically at the end of an accounting period, such as the end of a quarter or fiscal year.

 Here's why a balance sheet is considered a snapshot of a company's financial position:

 1. Specific Date: A balance sheet represents the financial position of a company as of a particular date. It captures the financial status of the company at that specific moment in time, providing a snapshot of its assets, liabilities, and equity as they stand on that date.

 2. Instantaneous Picture: Similar to a photograph, a balance sheet captures the financial position of the company in a single moment. It reflects the cumulative transactions and events that have occurred up until the given date, presenting a comprehensive view of the company's financial resources and obligations.

 3. Fixed Period: A balance sheet reflects the financial position at the end of an accounting period. It marks a distinct period's closure, summarizing the company's financial activities and outcomes up to that specific date.

 4. Assets, Liabilities, and Equity: A balance sheet presents the company's assets, liabilities, and shareholders' equity, also known as the accounting equation (Assets = Liabilities + Equity). It provides a detailed breakdown of the company's resources, obligations, and ownership interests at that particular moment.

 5. Quantitative Information: The balance sheet provides quantitative information about the company's financial position. It lists the specific values of assets, liabilities, and equity. often presented in a categorized and structured format to facilitate analysis and understanding.

 6. Comparison and Analysis: By comparing balance sheets from different periods, stakeholders can analyze changes in the company's financial position over time. This analysis helps in assessing the company's liquidity, solvency, financial health, and overall performance.

 However, it's important to note that while a balance sheet provides a snapshot of the company's financial position at a given point in time, it does not capture the dynamic nature of business operations and financial activities. It represents a static view and does not reflect the company's performance or cash flows over a period. For a comprehensive understanding of a company's financial performance and position, other financial statements like the income statement and cash flow statement should also be considered alongside the balance sheet.

Describe Government security with examples Or Describe the varieties of Government securities in the context of Bangladesh.

 Government Security: A tradable asset issued by a sovereign government is a government security. It assumes national debt liability. These securities come in two forms Short-term (sometimes called "treasury bills" with an original maturity of less than one year) and long-term (usually called government bonds or fixed-dared securities with an original maturity of one year or more).

Given that it was issued by a sovereign government, investing in it carries zero risk. Since the yield is set by the market, one can obtain an appealing rate of interest. Since these bonds are tradable in the secondary market, one can obtain instant liquidity by selling them in the market.

Major G-Securities in Bangladesh are:

a. Treasury Bills (T-Bills)

b. Bangladesh Government Treasury Bond (BGTB).

Government T-bills: Government treasury bills mature in one year or less. Like zero-coupon bonds, they do not pay interest prior to maturity, instead, they are sold at a discount of the par value to create a positive yield to maturity and redeemed at the face value at maturity. T-bills are commonly issued with maturity dates of 91 days, 182 days, and 364 days and are tradable in both wholesale and retail markets. Price is determined by the market. They are issued in scripless form Weekly (usually on Sunday) auctions of Treasury Bills are held following a pre-announced auction calendar with a specified amount. Bidders quote their prices. The Auction Committee determines the cut-off price from the offered prices.

Government T-Bonds: Government treasury bonds have the longest maturity, from two years to twenty years. They have a coupon payment every six months and are tradable in both wholesale and retail markets. They are risk-free fixed coupon-bearing debt instruments. Maturities are available within 2-20 years. It carries a half-yearly coupon payment and the principal is repaid on maturity. They are tradable instruments in the secondary market and also issued in scriptless form. A weekly (usually on Tuesday) auction of BGTB of a particular tenor is held following a pre-announced auction calendar with the specific amount. In case of a new issue, bidders quote their expected yields, and in a re-issue auction, they have to quote the price.

Define Repurchase agreement, Repo/Reverse Repo

 Repurchase agreements are contracts between two banks or a bank and the central bank. Banks provide assets like Treasury Bills and Treasury Bonds in exchange for overnight loans from other banks or the central bank. Additionally, it is agreed that these securities will be repurchased at maturity for a fixed price. Banks receive the funds they require for various operations in this manner, and the central bank receives the security. This is usually a less than one-week short-term credit facility set up by selling securities to another market player with the promise to buy them back at a predetermined price on a fixed date. Only surplus securities that are above SLR can be used for a repo.

 Basically, Repo is a repurchase agreement and refers to the rate at which commercial banks borrow money by selling their securities to the Central bank of our country i.e. in case of a shortage of funds or due to some statutory measures, Bangladesh bank have to maintain liquidity. It is one of the main tools of the Central Bank to keep inflation under control. Also known as a repo agreement, is a form of short-term borrowing, mainly in government securities.

 The repo market is an important source of funds for large financial institutions in the non-depository banking sector, which has grown to rival the traditional depository banking sector in size. Large institutional investors such as money market mutual funds lend money to financial institutions such as investment banks, either in exchange for (or secured by) collateral, such as Treasury bonds and mortgage-backed securities held by the borrower financial institutions

 Reverse Repo Rate is a mechanism to absorb the liquidity in the market, thus restricting the borrowing power of investors. Reverse Repo Rate is when the Central bank borrows money from banks when there is excess liquidity in the market. The banks benefit out of it by receiving interest for their holdings with the central bank.

 An increase in the reverse repo rate will decrease the money supply and vice- versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the BB, thereby decreasing the supply of money in the market. During high levels of inflation in the economy the Central bank increases the reverse repo. It encourages the banks to park more funds with the Central bank to earn higher returns on excess funds. Banks are left with lesser funds to extend loans and borrowings to consumers

How do you calculate the liquidity in the money market for a particular month in Bangladesh? What is the money market liquidity condition in Bangladesh

 Calculating liquidity in the money market for a particular month in Bangladesh requires a thorough understanding of the market's operations and the factors that influence it.

Basically, the Money market liquidity position in Bangladesh is stable and influenced by several factors. Here are some key factors that are considered when assessing the liquidity condition in the money market:

 1. Monetary Policy: The monetary policy decisions and interventions made by the central bank, the Bangladesh Bank, have a significant impact on money market liquidity. The central bank can adjust interest rates, conduct open market operations, and implement reserve requirements to influence liquidity conditions.

 2. Demand and Supply of Funds: The balance between the demand for funds and the available supply of funds in the money market affects liquidity. Factors such as government borrowing, corporate financing needs, and consumer credit demand can influence the demand for funds, while the availability of funds is influenced by factors such as savings, deposits, and investor preferences.

 

3. Government Spending and Revenue Collection: The fiscal activities of the government, including its spending and revenue collection, can impact money market liquidity. Government spending can inject funds into the market, while revenue collection can absorb liquidity from the system.

 4. Interbank Lending and Borrowing: The lending and borrowing activities among banks in the interbank market contribute to money market liquidity. When banks have excess funds, they can lend to other banks in need, thereby increasing liquidity. Conversely, if banks face liquidity shortages, they may need to borrow from other banks, affecting overall liquidity conditions.

 5. External Factors: External factors, such as foreign exchange flows, international trade, and global economic conditions, can also impact money market liquidity in Bangladesh. These factors can influence the availability of foreign currency and affect overall market liquidity.

 Monitoring these factors allows policymakers, market participants, and the central bank to assess the liquidity position in the money market and make informed decisions to maintain stability and smooth functioning.

Mention the steps taken by the Government and Bangladesh Bank to restore confidence and bring about stability in the Capital Market

 The Government of Bangladesh and the Bangladesh Bank (the central bank of Bangladesh) have taken several steps to restore confidence and bring about stability in the capital market. Some of the key steps taken include

 1. Strengthening Regulatory Framework: The regulatory framework of the capital market has been strengthened to enhance transparency, accountability, and investor protection. This includes amending existing laws and regulations, introducing new regulations, and implementing stricter enforcement measures.

 2. Enhanced Governance and Supervision: Measures have been taken to improve the governance and supervision of the capital market. This involves ensuring the independence and effectiveness of regulatory bodies such as the Bangladesh Securities and Exchange Commission (BSEC) and the Dhaka Stock Exchange (DSE) Efforts have been made to enhance the capacity and expertise of these institutions to effectively regulate and supervise the market

 3. Investor Education and Awareness: Initiatives have been launched to improve investor education and awareness about the capital market. These efforts aim to educate investors about investment risks, financial literacy, and the importance of conducting proper due diligence before making investment decisions. Investor protection campaigns, and seminars. Workshops and educational materials have been introduced to promote informed investment practices.

 

4. Market Surveillance and Monitoring: Enhanced market surveillance and monitoring mechanisms have been implemented to detect and prevent fraudulent activities, market manipulation, and insider trading. The regulatory authorities, such as the BSEC and the DSE, employ sophisticated monitoring tools and techniques to identify irregularities and take timely action.

 5. Strengthening Corporate Governance: Steps have been taken to improve corporate governance practices in listed companies. This includes promoting transparency, disclosure, and accountability among listed companies. Stricter regulations and guidelines have been introduced to ensure adherence to corporate governance standards.

 6. Introduction of Margin Trading and Short Selling: Margin trading and short selling have been introduced in the capital market to enhance liquidity and facilitate more sophisticated trading strategies. These measures allow investors to leverage their investments and engage in short-term trading activities, thereby increasing market efficiency.

 7. Introduction of Alternative Investment Products: To diversify investment opportunities and attract a broader investor base, the introduction of alternative investment products such as mutual funds, exchange-traded funds (ETFs), and real estate investment trusts (REITs) has been facilitated. These products offer investors additional avenues for investment and contribute to market stability.

 These steps collectively aim to restore confidence, improve investor protection, and bring stability to the capital market of Bangladesh. The government and regulatory authorities continue to monitor the market closely and take necessary actions to foster a sustainable and resilient capital market environment.

 

Define the Money Market. Briefly describe the products of the money market. Or briefly describe money market instruments available in Bangladesh

 The money market refers to trading in very short-term debt investments, short-term debt instruments are traded on the money market. It involves an ongoing exchange of funds between businesses, governments, banks, and other financial institutions for terms that can range from one night to as long as a year.

The money market comprises banks and financial institutions as intermediaries, 20 of them are primary dealers in treasury securities. Interbank clean and repo-based lending, BB's repo, reverse repo auctions, BB bills auctions, and treasury bills auctions are primary operations in the money market, there is also active secondary trade in treasury bills (up to 1-year maturity).

 There are several different types of money market instruments that are traded in the money market. These are:

1. Certificate of deposit: It is a negotiable term deposit accepted by commercial banks. It is usually issued through a promissory note. CDs can be issued to individuals, corporations, trusts, etc. Also, the CDs can be issued by scheduled commercial banks at a discount. And the duration of these varies between 3 months to 1 year. The same, when issued by a financial institution, is issued for a minimum of 1 year and a maximum of 3 years. It functions similarly to a fixed deposit, but with better negotiating power and more flexible liquidity conditions.

2. Commercial Paper: Corporates issue CDs to meet their short-term working capital requirements. Hence serves as an alternative to borrowing from a bank. Also, the period of commercial paper ranges from 15 days to 1 year. This money market product functions as a promissory note created by a business or organization to raise short-term capital. It is an unsecured instrument, meaning there is no connected collateral.

3. Treasury bills: Treasury Bills are one of the most popular money market instruments. They have varying short-term maturities it can only be issued by a nation's central government, when necessary, funds are needed to fulfill its immediate obligations. These do not pay interest but do allow for capital gains because they can be bought at a discount and paid in full when they mature. Due to the government's backing of Treasury Bills, there is very little risk.

4. Repurchase Agreements: Repurchase agreements are short-term borrowing instruments in which the issuer receiving the funds makes a promise to pay it back or repurchase it in the future. Government securities are typically traded under repurchase agreements.

5. Banker's Acceptance: In the financial industry, this popular money market product is exchanged. With a signed promise of future repayment, a loan is issued to the designated bank after a banker's acceptance. Bankers' acceptances (BAs) are financial instruments that arise out of commercial transactions and are essentially a guarantee by a bank to make payment.

6. Call Money: Call money refers to deposits or borrowings made overnight that mature automatically the next working day. It is a short-term loan that can be repaid immediately and is utilized for interbank trades. Call money is a crucial element of the money market. It has a number of unique qualities, including being a vehicle for managing funds for a very little period of time, an easy transaction to reverse, and a way to manage the balance sheet. Dealing in call money gives banks the chance to make interest on their excess cash.

7. Short Notice Money: It refers to transactions involving money that last longer than overnight but less than 14 days (maturity of 2 days to 14 days). Both call money and short notice money are short-term loans between financial institutions, hence they are comparable. Short notice loans are repaid up to 14 days after the lender gives notice

The interest rates in the market are market-driven and hence highly sensitive to demand and supply. Also, the interest rates have been known to fluctuate by a large % at certain times.

Briefly describe CRR and SLR in the context of Bangladesh. Why are they maintained? Or What are the current CRR and SLR for conventional banks and Islamic Banks?

 The cash reserve ratio (CRR) is the amount of money that the scheduled banks will have to have in deposit with the central bank of the country at all times. If the central bank raises its CRR, less money is available to banks. CRR is the amount the bank cannot be deposited anywhere or loaned to borrowers. All banks are obliged to keep their Cash balance with BB

In addition to monetary policy objectives, the BR can also determine processes for maintaining cash reserves, and currently, the required CRR is 4% for the bi-weekly average of gross demand and time Liabilities with a provision of at least 3.5% on a daily basis of the same Average of gross demand and time liabilities.

Every scheduled bank has to maintain a balance in cash with BB the amount of which shall not be less than such portion of its total demand and time liabilities as prescribed by BB from time to time, by notification in the official Gazette.

The Statutory Liquidity Ratio or SLR is the minimum deposit percentage a commercial bank must hold in the form of cash, gold, or other securities. It's actually a reserve obligation banks are expected to hold before granting credit to customers.

The Statutory Liquidity Requirement (SLR) is one of the quantitative and powerful tools of monetary control of the central banks. Changes in SLR can have a marked effect on the money and credit situation of a country. If the central bank raises the average reserve requirement of commercial banks, this would create a reserve deficiency or decrease in the available reserve of depository institutions. If the banks are unable to secure new reserves, they would be forced to contract both earnings and deposits which would result in a decline in the availability of credit and increase the market interest rates. The reverse would happen if the central bank lowers its reserve requirements.

At present, the required SLR is 13% daily for conventional banks and 5.5% daily for Islamic Shari'ah-based banks and Islamic Shari'ah-based banking or conventional banks of their average total demand and time liabilities. Banks are advised to follow the circular issued by the Monetary Policy Department of BB from time to time in this regard.

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are maintained in the banking sector to fulfill certain objectives and ensure the stability and soundness of the banking system. Here's an explanation of why CRR and SLR are maintained:

1. Cash Reserve Ratio (CRR): CRR is the portion of a bank's total deposits that it is required to hold in the form of cash reserves with the central bank. It is set by the central bank and serves the following purposes:

a. Control Money Supply: By adjusting the CRR, the central bank can influence the money supply in the economy. If the central bank wants to reduce liquidity or control inflation, it can increase the CRR, thereby reducing the funds available for lending by banks. On the other hand, if the central bank wants to stimulate economic growth, it can lower the CRR, increasing the availability of funds for lending.

b. Ensuring Solvency and Stability: Maintaining a certain level of cash reserves helps banks meet their withdrawal obligations to depositors. It acts as a safeguard against bank runs or sudden withdrawal demands, ensuring the solvency and stability of banks.

c. Monetary Policy Transmission: CRR plays a crucial role in the transmission of monetary policy. When the central bank adjusts the CRR, it affects the cost of funds for banks. If the CRR is increased, banks have to hold more funds as reserves, reducing the funds available for lending and potentially increasing lending rates. Conversely, a decrease in the CRR can lead to lower lending rates, stimulating borrowing and economic activity.

2. Statutory Liquidity Ratio (SLR): SLR is the portion of a bank's total deposits that it is required to maintain in the form of specified liquid assets, such as government securities, gold, or cash. Similar to CRR. SLR serves the following purposes:

a. Liquidity Management: SLR ensures that banks maintain a certain level of liquidity to meet their short-term obligations and unexpected liquidity demands. It acts as a buffer to handle unforeseen events and maintain the stability of the banking system.

b. Safety and Stability: By requiring banks to invest in safe and liquid assets, SLR ensures that banks have a cushion of assets that can be easily converted into cash if needed. This helps in mitigating liquidity risks and promoting financial stability.

c. Credit Flow Regulation: SLR also influences the credit flow in the economy. When banks invest a significant portion of their deposits in government securities to meet the SL.R requirement. it reduces the funds available for lending to the private sector. The central bank can adjust the SLR to control credit expansion or contraction, depending on the monetary policy goals.

Overall, CRR and SLR are regulatory measures that help maintain liquidity, stability, and control over the banking system. They provide a mechanism for the central bank to manage money supply, ensure solvency, and regulate credit flow in the economy.

What is SLR? Why and how is it maintained? Or what is the Statutory Liquidity Ratio (SLR) of a bank? How is it calculated?

 Statutory liquidity ratio or SLR is the minimum deposit percentage a commercial bank must have in the form of cash, gold, or other securities. It's actually a reserve obligation banks are expected to hold before granting credit to customers.

The Statutory Liquidity Requirement (SLR) is one of the quantitative and powerful tools of monetary control of the central banks. Changes in SLR can have a marked effect on the money and credit situation of a country. If the central bank raises the average reserve requirement of commercial banks, this would create a reserve deficiency or decrease in the available reserve of depository institutions. If the banks are unable to secure new reserves, they would be forced to contract both earnings and deposits which would result in a decline in the availability of credit and increase the market interest rates. The reverse would happen if the central bank lowers its reserve requirements

As per BB DOS Circular No.-01, dated 19.01.2014, every scheduled bank has to maintain assets in cash or gold or in the form of un-encumbered approved securities the market value of which shall not be less than such portion of its total demand and time liabilities as prescribed by BB from time to time. BB may also prescribe the procedure of determination of assets and liabilities and percentages of maintainable assets in different classes.

At present, the required SLR is 13% daily for conventional banks and 5.5% daily for Islamic Shari'ah-based banks and Islamic Shari'ah-based banking or conventional banks of their average total demand and time liabilities. Banks are advised to follow the circular issued by the Monetary Policy Department of BB from time to time in this regard. The SLR is fixed for the below-mentioned reasons:

·        Monitor bank credit growth.

·        Guarantee the solvency of commercial banks.

·        Force banks to buy government bonds and other securities.

·        Stimulate demand and growth; this is done by lowering the SLR to provide liquidity in commercial banks.

 

If a bank fails to maintain the prescribed SLR, it is liable to pay a penalty to the Bangladesh Bank Penalty will be charged at the prevailing Special Repo Rate on the amount by which the SLR falls short daily.

(i) Components eligible for calculation of Statutory Liquidity Reserve: The eligible components for maintaining Statutory Liquidity Reserve are cash in tills (both local and foreign currency), gold, daily excess reserve (excess of Cash Reserve) maintained with BB. balance maintained with the agent bank of BB and un-encumbered approved securities, credit balance in Foreign Currency Clearing Account maintained with BB.

Daily excess of Cash Reserve (if any) will be calculated using the following formula: Daily excess of Cash Reserve (Day-end balance of unencumbered cash maintained in Taka current accounts with BB-Required cash reserve on a Bi-weekly average basis). For maintenance of CRR and SLR, demand and time liabilities should include all on-balance sheet liabilities excluding the items listed below:

a)     Paid up capital and reserves,

b)    Loans taken from BB.

c)     Credit Balance in Profit and Loss account

d)    Inter-bank items

e)     Repo, Special repo, and any kind of liquidity support taken from BB.

Banks are advised to approach BB for any doubt in reckoning a particular liability as demand or time liability for CRR and SLR computation.

BB has recently changed its monetary policy targeting framework and introduced some new tools in its Monetary Policy Statement (MPS) of July-December, 2023. What are the changes? Do you think the changes will have any impact on Treasury Management

 The Monetary Policy Statement (MPS) of July-December 2023 by Bangladesh Bank (BB) introduced several new policy initiatives:

 

i.                   Policy Interest Rate Corridor: This is a system where the central bank sets the floor and ceiling for short-term interest rates to guide market interest rates.

ii.                 Reference Interest Rate for Lending: This could be a benchmark interest rate that banks use to price loans.

iii.              Exchange Rate Unification: This could involve merging multiple exchange rates into a single rate.

iv.              Calculation of Gross International Reserves (GIR) as per Balance of Payments and International Investment Position Manual (BPM6): This could involve changing the method of calculating GIR to align with international standards.

As for the impact on Treasury Management, changes in monetary policy can indeed have significant effects. For instance, changes in policy interest rates influence commercial interest rates. This can affect the cost of government borrowing and the return on government investments. The introduction of a policy interest rate corridor could provide more predictability for treasury management as it sets a range for interest rate fluctuations.

Moreover, the reference interest rate for lending could impact the cost of new government debt if the government borrows domestically. Exchange rate unification could affect the local currency value of foreign currency-denominated debt payments and receipts.

However, the specific impacts would depend on the details of the changes and the broader economic context. It's also important to note that the effects of monetary policy changes can take time to materialize. Therefore, ongoing monitoring and adjustment would be necessary. Please consult with a financial advisor or professional for more specific insights.

What is CRR and what are the components of Cash Reserve? What is the Cash Reserve Ratio? How do commercial banks maintain CRR?

 The cash reserve ratio (CRR) is the amount of money that the scheduled banks will have to have in deposit with the central bank of the country at all times. If the central bank raises CRR, less money is available to banks. CRR is the amount the bank cannot be deposited anywhere or loaned to borrowers. All banks are obliged to keep their Cash balance with the Central Bank.

 In addition to monetary policy objectives, the BB can also determine processes for maintaining cash reserves. Currently, the required CRR is 4% for the bi-weekly average of gross demand and time Liabilities with a provision of at least 3.5% on a daily basis of the same ATDTL.

 Every scheduled bank has to maintain a balance in cash with BB the amount of which shall not be less than such portion of its total demand and time liabilities as prescribed by BB from time to time, by notification in the official Gazette.

 CRR is one of the following: Bangladesh Bank’s primary tool mainly used to control inflation/deflation economic liquidity. Bangladesh Bank is the top banking institution in Bangladesh and has it Right to amend the CRR at any time.

 The cash reserve ratio is particularly useful in dealing with the rate of inflation/deflation and liquidity in the country. If the central bank is of the opinion that there is too much liquidity in the economy, it will increase the CRR. CRR is extremely powerful tool in the hands of BB, which can dictate the terms in the economy.

 Components of cash reserve:

In the context of Bangladesh Bank (BB), the components of the Cash Reserve Ratio include the following:

Demand and Time Liabilities: The CRR is calculated based on a certain percentage of both demand and time liabilities of banks. Demand liabilities include deposits that are payable on demand, such as current account deposits. Time liabilities include deposits with a specific maturity period, like fixed deposits.

Cash Balances with the Bangladesh Bank: Banks are required to maintain a certain percentage of their demand and time liabilities in the form of cash balances with the Bangladesh Bank. At present, banks are allowed to maintain cash reserves with local currency only. The day-end balances of Taka's current accounts maintained by different BB offices will be aggregated to compute the maintained cash reserve for the day.

Calculation and maintenance:

The Cash Reserve Ratio is expressed as a percentage of eligible liabilities. The ratio is set by the central bank, and banks are required to maintain this reserve in the form of cash with the central bank. This reserve is non-interest-bearing. The balance so maintained shall be unencumbered in all aspects. The encumbered (lien against discounting facility, etc., and capital lien in case of foreign banks) portion of the balance will be deducted while computing both the maintained amount and excess of cash reserve.

Regulatory Tool: The CRR is used as a monetary policy tool to control liquidity in the banking system. By adjusting the CRR, the central bank can influence the amount of money available for lending in the economy. If the CRR is increased, banks have to keep more funds with the central bank, reducing the amount available for lending and vice versa.

Monetary Policy Transmission:

Changes in the Cash Reserve Ratio affect the money supply and consequently, interest rates. It is a tool through which the central bank can influence the cost and availability of credit in the economy, thereby impacting inflation and economic growth.

It is important to note that the specific details, such as the percentage of CRR and types of liabilities subject to the ratio, can vary between countries and are determined by the central bank’s monetary policy framework. In the context of Bangladesh Bank, the specific guidelines and regulations related to the Cash Reserve Ratio will be outlined in the central bank’s policies and circulars.