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BB ordered to reserve provisions against losses in shares and bonds

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On Wednesday (May 24), Bangladesh Bank issued a directive to banks regarding the reservation of provisions against investment losses in shares, bonds, debentures, and mutual funds of listed companies.

The directive was sent to the managing directors and chief executive officers of all banks operating in the country. According to the central bank’s instructions, if the purchase price of securities, other than government securities, in terms of investment is lower than the latest market value, banks must reserve provisions equivalent to the difference between the purchase price and the latest market value.

This difference in price will be recognized as a loss in investment value. This provision requirement applies to listed shares, bonds, debentures, and mutual funds or any portfolio of funds. Additionally, provisions will be reserved separately for equity shares, bonds, debentures, and mutual funds or any portfolio of listed companies.

In addition, it has been stated that in the case of investment in non-listed equity shares, if the total value of the company decreases, banks must reserve provisions equivalent to the reduced value as a percentage of the investment ratio within the institution, through the medium of the bank. If the invested company ceases to exist or its operations are suspended or deemed non-performing, provisions must be reserved for the same amount as the investment, unless any visible operations are carried out.

Furthermore, the directive specifies that for non-convertible cumulative preference shares, if the bank does not receive the specified interest, dividends, or cash gains as per the agreement, a provision of 25% of the principal amount must be reserved at the end of the first year. For the second year, an additional 25% and a provision of 100% must be reserved if the accrued gains remain unpaid for three years.

According to the recent directive from the central bank, if the average purchase price of be-maturity mutual fund units is lower than the surrender price (the value at which units are returned to the asset management company), banks must reserve provisions equal to the amount of the difference between the average purchase price and the surrender price. In line with these guidelines, banks are required to maintain provisions on a quarterly basis and submit the provision reserve information to the Bangladesh Bank.

This directive, issued under Section 45 of the Bank Companies Act, 1991, will come into effect from June 30th.

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Banks in Industrial Areas to Open June 14-16 for Eid Payments

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To ensure timely payment of salaries and bonuses to garment industry workers before Eid-ul-Azha, the branches of banks in key industrial areas will remain open on a limited basis on June 14, 15, and 16.

The Bangladesh Bank (BB) issued a notification stating that bank branches in Dhaka metropolitan, Ashulia, Tongi, Gazipur, Savar, Bhaluka, and Narayanganj will operate on these days to facilitate financial transactions for garment sector employees.

Typically, Friday and Saturday (June 14 and 15) are weekly holidays, and Sunday (June 16) will be closed for Eid. Despite these closures, the BB has mandated that banks in industrial regions stay open to manage the disbursement of wages and bonuses and facilitate the sale of export bills.

Additionally, bank branches in Chattogram metropolitan and industrial areas will also be open to support garment workers’ payments and the processing of export bills.

The BB has instructed banks to coordinate with local authorities to ensure adequate security at the branches during this period.

Eid-ul-Azha, one of the most significant religious festivals for Muslims, will be celebrated in Bangladesh on June 17.

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Cenbank Mandates Real-Time Reporting of Willful Defaulters

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The Bangladesh Bank (BB) has issued new instructions to banks to submit data on willful defaulters to the Credit Information Bureau (CIB) database. This directive was issued on Tuesday, requiring immediate compliance from commercial banks and non-banking financial institutions (NBFIs).

In a circular released by the CIB of the central bank, banks have been instructed to report their June data in real-time starting July 1. The circular has been sent to top executives of banks for prompt execution.

This move follows an earlier initiative by the BB, outlined in a circular on March 12, aimed at identifying willful defaulters within the banking sector. The central bank also detailed actions to be taken against such defaulters.

According to the circular, any client who takes a loan anonymously and misuses it will be classified as a willful defaulter. Banks were directed to establish a ‘willful defaulter identification unit’ by April 9 to facilitate this identification process.

The circular further stipulates penalties for non-compliance. Banks that violate these conditions will face fines ranging from Tk 50 lakhs to Tk 1 crore. Continued violations will incur additional fines of Tk 1 lakh per day.

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Cenbank Raises Dollar Price to Tk 117

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The Bangladesh Bank has adjusted the dollar price to Tk117 from Tk110 by introducing the crawling peg exchange rate mechanism.

Under this new approach, the bank will buy and sell dollars with Tk117 as the mid rate.

This decision was reached during a meeting of the monetary policy committee on Wednesday, May 8th.

Additionally, the committee has opted to discontinue the SMART lending rate mechanism, allowing banks to set their lending rates based on dollar demand and supply, according to a circular issued after the meeting.

The crawling peg system permits a currency with a fixed exchange rate to fluctuate within a specified band of rates, combining features of both fixed and floating exchange rate regimes.

On May 5th, Bangladesh Bank Governor Abdur Rouf Talukder announced the adoption of a market-based interest rate and the implementation of a crawling peg system to stabilize the foreign exchange rate.

He stated that the central bank is collaborating with prominent economists and bankers to devise a contractionary monetary policy aimed at curbing inflation and restoring macroeconomic stability.

Earlier, on April 2nd, the World Bank stressed the importance of a crawling peg mechanism aligned with market-clearing exchange rates to narrow the gap between formal and informal exchange rates, as outlined in the latest Bangladesh Development Update report.

Meanwhile, the International Monetary Fund (IMF) has advocated for a market-based dollar rate. In January 2023, the IMF attached several conditions to a $4.7 billion loan facility over a three-and-a-half-year period. Bangladesh has received two installments of the loan by fulfilling nearly all conditions, except for the reserve requirement.

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