Government considers watchdog for defaulted loans

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The government is considering forming a watchdog body to deal with the systematic problems of non-performing loans that have plagued some banks and financial institutions over the years, according to an official document.

To be named the Financial Stability Board (FSC), the forum will propose measures to maintain financial stability, improve the resolution regime of financial institutions and design macroprudential regulations and instruments, reports the UNB.

The country’s banking system has long been plagued with delinquent loans with bad borrowers, hurting good and honest businesses. This has been a major concern in the financial sector, with issues even being brought before the country’s supreme court.

As of January 25, 2021, more than 300,000 defaults were listed in various banks and financial institutions, according to a statement from Finance Minister AHM Mustafa Kamal in Parliament. The number was 334,982 as of October 2020.

Due to the prevalence of the COVID-19 pandemic, the official document indicates, a deferral facility has been provided for the classification of loans for a period of one year from January 1, 2020 to December 31, 2020.

To facilitate the repayment of outstanding loan maturities, from January 2021, borrowers were given the option to increase the term of the existing unclassified term loan account by up to 50%.

As a result of these initiatives, classified loans declined from the previous year, the document said.

FSC training has long been demanded by international development partners.

The World Bank proposed to form such a body in 2011 while the International Monetary Fund also recommended the formation of a council to oversee the financial sector.

The government has been working on it for some time. Several meetings were held to discuss its details.

The Ministry of Finance, Central Bank, Bangladesh Securities and Exchange Commission, Microcredit Regulatory Authority and Insurance Development and Regulatory Authority as well as relevant government agencies such as the National Revenue Council will be included in this FSC, according to sources.

The finance minister will chair the FSC while the main secretaries of the finance ministry and the heads of all financial regulators would be members.

The BB’s deputy governor in charge of the financial stability department will act as member-secretary, according to the source.

The government has chosen to develop guidelines for stress testing given systemic risks to ensure financial sector stability, according to the document.

It also decided to create in the future a financial stability map in line with international best practices.

According to an official document, a number of reforms have been undertaken in the spirit of building a good credit culture in the country. For example, good borrowers will receive incentives.

Software has been launched for the monitoring of large bank loans, whereby a clear idea of ​​large bank loans from the entire banking sector will be available.

It will be possible to take the necessary measures accordingly.

Stress testing is a simulation technique used to determine the reactions of different financial institutions under a set of exceptional but plausible assumptions through a series of tests.

At the institutional level, stress testing techniques make it possible to quantify the impact of variations in a certain number of risk factors on the institution’s portfolio of assets and liabilities.

For example, a portfolio stress test approximates the value of the portfolio using a set of exceptional but plausible events in abnormal markets.


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