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Monday, March 23, 2009


Non-bank Financial Institutions

The non-bank financial institutions (NBFIs) constitute a rapidly growing segment of the financial system in Bangladesh. The NBFIs have been contributing toward increasing both the quality and quantity of financial services and thus mitigating the lapses of existing financial intermediation to meet the growing needs of different types of investment in the country. At present, 29 NBFIs are operating their business across the country of which one is government owned, 15 are privately owned local companies, and the remaining 13 are established under joint venture with foreign participation.

Asset Liability Position of NBFIs
Total assets of NBFIs showed a growth of 28.2 percent and stood at Tk.90.2 billion in June 2008 compared with Tk.70.4 billion in June 2007. Leased assets constituted about 36.5 percent of total 72 assets of the NBFIs while term financing and working capital generated 27.3 percent and 16.1 percent respectively. Figure 4.4.1 shows that among different types of assets of NBFIs, working capital has increased significantly which indicates better capacity of the NBFIs to mitigate any financial mismatch by balancing current assets with current liabilities. However, three out of the existing 29 NBFIs showed negative position of working capital during the period which indicates that they need to be more efficient in their current liabilities and liquidity management. Up to June 2008, Delta Brac Housing (DBH), which holds about 83 percent of total housing finance of NBFIs, ranked the top in terms of share in total assets (11.2 percent) of the sector followed by the IDLC Finance Limited (9.4 percent). There exists considerable variation in terms of asset holding by NBFIs as 57.3 percent of the assets of the entire sector is accounted for by top nine of them while the bottom nine holds only 9.4 percent of total assets.

Performance of NBFIs

The NBFIs are increasingly coming forward to provide credit facilities for meeting the
diversified demand for investment fund in the country's expanding economy. According to the available data (provisional), private sector credit by NBFIs grew at the rate of 38.7 percent and stood at Tk.108.6 billion at the end of December 2008 which was Tk.78.3 billion in December 2007 (Figure 4.4.2). The outstanding position of industrial lending by NBFIs also increased by 10.4 percent to Tk.61.4 billion at the end of December 2008 compared with Tk.55.6 billion in December 2007. However, overdue as a share of outstanding industrial loans increased to 8.0 percent in December 2008 from 6.8 percent in December 2007. This shows that the NBFIs need to streamline their loan disbursement methods with focus on low risk industrial segments and instill better monitoring mechanisms in order to reduce risks associated with their assets. 73
Nevertheless, the contribution of NBFIs to industrial financing still remains very small. During July-December 2008, the share of the NBFIs in total disbursed industrial loans was only 4.2 percent. More than 80 percent of the loans disbursed by NBFIs were term lending as their capital structure provides better support for term financing rather than working capital financing. Total classified loan of all NBFIs stood at Tk.7.1 billion in December 2008 against their total outstanding loan of Tk.106.1 billion showing a classified loan to total outstanding ratio of 6.7 percent which was 7.1 percent at the end of December 2007.
The return on equity (ROE), which shows the earning capacity of shareholder’s book value investment, shows significant variation across NBFIs. In June 2008, the highest ROE is observed for IDCOL (24.1 percent) followed by Prime Finance (22.9 percent) and DBH (20.9 percent). On the other hand, ROEs of several NBFIs were lower than the industry average and the interest rate on deposits indicating requirements on the part of these NBFIs to access both low cost funding and ensure better portfolio management to improve performance.

Role of Bangladesh Bank

The Bangladesh Bank (BB), as the regulator of NBFI operations in the country, has been
pursuing policies and taking measures to ensure healthy and efficient expansion of NBFI
activities in the country. In order to bring the NBFIs under an effective risk management system, BB identified four core risk areas in September 2005 covering credit risk management (CRM), asset and liability management (ALM), internal control and compliance (ICC), and information and communication technology (ICT). The BB also provided guidelines for the NBFIs to develop structures and undertake measures to improve their institutional risk management system in core risk areas. In line with core risks management guidelines, BB also introduced risk based audit system generally known as 'system audit' for the NBFIs. For the purpose, the Department of Financial Institutions and Market (DFIM) conducted a special inspection on the basis of these core risk areas in IDLC and Union Leasing Company Limited in July 2007. After modifications of the audit process based on the findings of this first phase inspection, the second phase inspection has started in January 2009 in IPDC and Prime Finance Limited. The remaining NBFIs would be brought under the audit system in phases. BB also plans to rank the NBFIs on the basis of their compliance status of core risk management guidelines. Against the backdrop of the global financial crisis, NBFIs have been asked to be cautious in their financial management. As a part of better management, BB has instructed the NBFIs whose classified loan to total outstanding loan ratios have risen sharply to take adequate steps to realize the default loans. The BB has asked the NBFIs to take measures to rationalize investment portfolios and overcome other adverse trends such as provision shortfalls. The NBFIs have been instructed to comply with the Anti-Money Laundering Ordinance 2008 and inform the Anti- Money Laundering Department of BB of any suspicious transactions. The BB has also taken initiatives for ensuring better corporate governance of the NBFIs through streamlining the managing boards for enhancing efficiency and accountability. The NBFIs on their part need to diversify in financial instruments and commercial papers to raise adequate funds from the market so that they can minimize their dependence on borrowing from the inter-bank money market at higher interest rates in times of need. In this respect, assistance needs to be provided to the NBFIs for securitizing and selling quality financial assets. Since the NBFIs serve as important complements to the banking sector in meeting the financing needs that are not well suited to the banks, the development of the NBFIs is crucial to ensuring a sound financial system in the country. It is important to view the NBFIs as a catalyst to conomic growth and provide necessary support and guidance for their development within a longer term framework which would improve financial intermediation and enable the NBFIs to play their due role in overall development of the country.



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