Dhaka, Bangladesh (BBN) – The central bank of Bangladesh on Thursday established a Central Database for Large Credit (CDLC) to monitor the large exposures in a more structured way, officials said.
The Bangladesh Bank (BB), the country’s central bank, has decided to introduce a new oversight framework for large exposures to identify and manage the low quality assets well ahead of time before they appear as a cause to financial distress.
“The framework will involve all concerned banks and financial institutions (FIs) to initiate joint or individual, as the case may be, prompt corrective efforts for managing those assets,” the BB said in a notification.
The central bank said the bank has adopted a series of reform measures to strengthen its supervisory and prudential framework for enhancing financial discipline and establishing a robust financial system in line with the international best practices.
As a result, a considerable progress has been made in credit discipline and recovery initiatives, it added.
A portion of loans may, however, turn into bad/loss that making stress on financial soundness, e.g., earnings, and capital adequacy of an individual bank or FI, thereby leading to financial system instability.
Indeed, a large exposure could appear as burdensome for an individual bank or FI and create instability in the whole financial system.
“Though the low quality credit portfolio is not that significant yet, it may create stress on the individual bank or FI in particular and the financial system in general if left unaddressed,” it noted.
Under the new instructions, the banks and FIs shall verify whether the name of individual, proprietor, partner, director, guarantor or trustee of the organization or company appear in the list of defaulters with reference to the National Identification Number (NID), Electronic Taxpayer’s Identification Number (e-TIN), etc. while carrying out the credit appraisal.
Furthermore, in case of any doubt arising on account of identical names, concerned bank or FI shall verify the identity of the individual, proprietor, partner, director, guarantor or trustee of the organization or company.
With a view to ensuring proper end-use of funds and preventing diversion of funds by the borrowers, the banks and FIs shall engage auditors for specific certification purpose without relying on the certification given by borrowers’ auditors.
“However, this does not, in any way, substitute bank’s or FI’s basic due diligence in this regard,” the BB explained.
The Board of Directors of banks and FIs should proactively use the CDLC for early recognition of deterioration in asset quality and taking necessary steps to halt it and focus on improving the credit risk management system.
The Financial Stability Department (FSD) of BB shall make the required reporting formats available to the banks and FIs in due course.
The banks and FIs are advised to submit their returns as per specified MS Excel format (soft copy only) to FSD until further order.
The first reporting month will be December 2015 and the first report to be submitted by 29 February 2016.