• This edition is published in 2021 and is based on data and information available as of

December 2020, unless stated otherwise. Feedback on this report may be given to
[email protected].
• Cover Design: Financial Stability Department (FSD), Bangladesh Bank
• This publication can be accessed through internet at https://www.bb.org.bd/en/
index.php/publication/publictn/0/37
FINANCIAL STABILITY REPORT
2020

Financial Stability Department

Bangladesh Bank
Advisor:
Abu Farah Md. Nasser, Deputy Governor

Lead Editors:
1. Main Uddin Ahmed, Executive Director
2. Md. Kabir Ahmed, PhD, Executive Director
3. Sheikh Humayun Kabir, General Manager

Editors:
1. Parikshit Chandra Paul, Deputy General Manager
2. Shamsul Arefeen, Deputy General Manager
3. Mohammad Zahir Hussain, Deputy General Manager
4. Md. Ala Uddin, Deputy General Manager
5. Abeda Rahim, Deputy General Manager
6. Kazi Arif Uz Zaman, PhD, Deputy General Manager
7. Shamima Sharmin, Deputy General Manager

Associate Editors:
1. Md. Masum Haider, Joint Director
2. Kazi Md. Masum, Joint Director
3. Abdullah-Hil-Baki, Joint Director
4. Md. Asaduzzaman Khan, Joint Director
5. A.S.M Mehedi Hasan, Joint Director

Contributors:
1. Uttam Chandra Paul, Deputy Director
2. Foyzul Ahmed, Deputy Director
3. Shahnaj Akhter Dipu, Deputy Director
4. Md. Harun Or Rashid, Deputy Director
5. Tanjir Ahmed Emon, Deputy Director
6. Md. Ataur Rahman Chowdhury, Deputy Director
7. Kawser Ahmed Nahid, Deputy Director
8. Al-Amin Sikder, Deputy Director
9. Md. Barkat Ullah, Deputy Director
10. Roksana Ahmed, Deputy Director
11. Md. Iftekhar-ul-Islam, Assistant Director
12. Mst. Shahida Kamrun, Assistant Director
13. Md. Hasib, Assistant Director
14. Md. Manirul Islam, Assistant Director

Data/Write up Support:
Agricultural Credit Department (ACD) Forex Reserve & Treasury Management Department (FRTMD)
Banking Regulation and Policy Department (BRPD) Monetary Policy Department (MPD)
Debt Management Department (DMD) Payment Systems Department (PSD)
Department of Financial Institutions and Markets (DFIM) Research Department
Department of Off-Site Supervision (DOS) Statistics Department
Deposit Insurance Department (DID) SME & Special Programmes Department (SMESPD)
Foreign Exchange Policy Department (FEPD) Bangladesh Securities and Exchange Commission (BSEC)
Foreign Exchange Operation Department (FEOD) Insurance Development and Regulatory Authority (IDRA)
Financial Inclusion Department (FID) Microcredit Regulatory Authority (MRA)

Financial Stability Report 2020 iii

 Message from the Governor
The global financial system experienced unprecedented challenges in the wake of COVID-19.
Almost all affected countries faced tremendous strain in restoring economic activities towards
sustained growth paths, attributable largely to recurrent lockdowns and mobility restriction,
general holidays and various containment measures. In the backdrop of losing millions of lives and
disrupted livelihoods, interruptions in global production networks and trades, and elevated
uncertainties in business and investments, central banks and monetary authorities in different
countries adopted a broad range of policy measures while governments in most countries
declared various grants and sizeable stimulus packages to revive economic activities. Such
extraordinary policy measures have eased financial conditions and helped the global economy to
contain financial stability risk.

Many advanced economies have registered stronger-than-expected growth and faster recovery in
recent months owing to expansionary policy measures as well as their rapid access to large-scale
vaccination. For instance, China has already returned to the pre-COVID-19 level in the last quarter
of 2020 while the US economy is gathering momentum to reach its pre-pandemic level in 2021.
However, the progress is somewhat subdued in the Euro-zone while the oil-exporting countries are
encountering major challenges amid the reduced demand for fuel since the subsequent waves of
COVID-19 are striking around the world. Nevertheless, recovery of global economy seems to be
largely dependent on proper policies on the distribution and implementation of the mass level
vaccine along with prudent formulation of public policies-fiscal and monetary policies in particular.

Despite the drastic contraction of the global economy in 2020 due to COVID-19, Bangladesh
economy remained reasonably resilient and stable with impressive economic growth compared
to its peer countries. The agriculture sector remained least affected due to COVID-19 while the
industrial and manufacturing sectors were affected notably in the early stage of the pandemic, but
later gained momentum in the second and third quarters of 2020. Real GDP growth stood at 5.2
percent in FY20 while most countries faced economic contraction in 2020. Real GDP growth is
projected to rise to 6.1 percent in FY21. General inflation remained well contained even at end
2020. The external sector recovered early with notable growth of remittance inflows, sustained
export and also import growth. Current Account Balance entered into a positive territory by the
end of FY20. Foreign exchange reserves recorded a new high of USD 43.17 billion, standing
equivalent to nearly eight months of import payment. The banking sector has shown notable
resilience to the unexpected shocks of the pandemic. Asset quality of the banking industry
considerably improved compared to the preceding year. The solvency position of the banking
industry as a whole improved notably compared to the pre-pandemic level. Financial institutions
are expected to experience gradual recovery. The stock market has rebounded since the second
half of the year 2020.

With a view to reviving economic activities and contain the adverse impact of the pandemic, the
Government and Bangladesh Bank (BB) have undertaken all possible measures. The Government
has declared various stimulus packages worth BDT 1.24 trillion up to December 2020 to support

Financial Stability Report 2020 v

the various affected sectors. On the other hand, Bangladesh Bank promptly responded to the
pandemic by introducing several refinance schemes and adopted a number of supportive policy
measures. BB has eased the reserve requirements for scheduled banks and cut key policy rates. We
have also raised the advance-to-deposit ratio (ADR) limit and relaxed loan classification policy,
enhanced the size of the Export Development Fund to support manufacturer-exporters of the
country. Moreover, we extended foreign exchange-related policy support to facilitate urgent
imports of life-saving drugs and medical equipment related to the treatment of COVID-19.
Besides, banks have been instructed to ensure smooth transactions through enhanced use of
electronic banking platforms and mobile financial services for the payment of business
obligations, wages, and allowances of the workforce of export-oriented industries.

Bangladesh Bank decided to establish a fund of EURO 200 million along with the existing USD 200
million in the Green Transformation fund. A “Credit Guarantee Scheme” has been introduced for
the Cottage, Micro and Small enterprises that are facing difficulties to obtain loan/investment
from banks and financial institutions not having adequate collateral. Bangladesh Bank also
instructed the banks to allocate special budget for the health sector to tackle the deadly effects of
the pandemic under the Corporate Social Responsibility (CSR) activity. In order to digitize and
modernize the payments systems of the country, Bangladesh Bank has decided to introduce
interoperability between banks and mobile financial services (MFS) providers.

Considering notable outcomes of the stimulus packages and also policy supports, we still feel
there is no room to remain complacent. In order to ensure a growth supportive and stable financial
sector, the stakeholders of the financial system need to take both preemptive and forward-looking
measures in a timely fashion. In this perspective, I would like to remind all the stakeholders of the
financial system that effort of the Government and ours alone may not suffice to repair the
damage of the pandemic in full extent. Financial intermediaries as well as the associated
regulators must remain vigilant about the ongoing course of the pandemic as well as policy
measures taken or going to be taken in coming days.

The year 2021 would be both promising as well as challenging for us. While the advanced
economies are expecting to regain, the recent wave of the pandemic in Bangladesh has put a sign
of concern regarding the way the domestic economy would shape in 2021. We all realize now that
COVID-19 has already exposed the low-income people with disproportionate income losses which
may raise the inequality and poverty in the economy in future. Therefore, financial intermediaries
need to redesign their lending strategy considering the new normal scenario. Employment
generation should get significant priority while providing loans and advances and extending
other financial services. CSR initiatives of the banks and FIs need to be revamped targeting hard hit
strata of the people as well as healthcare sector of the country. Moreover, banks and FIs must
ensure proper utilization of loans including those from COVID-19 related refinance schemes.
Alongside, they also need to enhance their loan recovery initiatives as the economy starts
recovering. What is more, as the exact extent and trajectory of COVID-19 is still uncertain, the
stakeholders of the financial system should devise forward looking strategies to cope up with this
new normal situation.

Finally, I hope that this report would be able to provide valuable insights to the stakeholders of the
financial system about the downside risks as well as upside potentials amid the ongoing COVID-19
pandemic situation. I wish to register my appreciation for the diligent efforts of the Financial
Stability Department in preparation of this report.

Fazle Kabir
Governor

vi Financial Stability Report 2020

 Message from the Deputy Governor
COVID-19 has been leaving permanent footprint on the face of the global economy.
However, relentless efforts of the authorities, apparent rise in awareness of the public,
development and inoculation of COVID-19 vaccine effectively ushered rays of hope on
inclusive recovery from the later part of CY20. Nevertheless, the upcoming extent of risk is
still incomprehensible as subsequent waves of this deadly pandemic have been
exasperating the endurance for many countries. In tandem with global infection scenario,
Bangladesh has also been undergoing an unexpected second wave since the early March
2021 and consequently, prompted to adopt an array of containment measures, which may
have exerted important bearing on economic recovery in recent months. Whatsoever, it
could be reasonable to expect that the economy will get its momentum back once the
pandemic will tone down.

Amid the gloomy economic progress around the world, macroeconomic situation of
Bangladesh showed a considerable level of buoyancy, largely attributable to prudent steps
taken by Bangladesh Bank and the Government. The real GDP growth of Bangladesh stood at
5.24 percent in FY20, notably higher than the growth achieved by many of its peers and
neighbors. Resiliency in agriculture sector helped to maintain the price level stable. Country’s
foreign remittance inflow, dispelling all speculation, experienced remarkable growth and
contributed to the buildup of record height of foreign exchange reserve. These external and
domestic developments helped the country to propel the recovery path during this
pandemic period which, in turn, paved the way of our financial system demonstrate level of
stability during CY20. Substantial asset growth was observed in the banking sector and the
quality of assets recorded further improvement. Besides, the liquidity of the banking sector
was adequate to support the lending activities in the real economy. Unsurprisingly,
pandemic-stricken economy caused the profitability of the banking sector to decline in CY20.
However, capital to risk-weighted assets ratio of the banking sector remained at 11.6 percent
in CY20, well above the minimum regulatory requirement of 10 percent. BB proactively
addressed the liquidity challenges in the context of the pandemic and adjusted the Bank Rate,
CRR, and Repo rate. Moreover, timely adoption of expansionary monetary policy provided
positive signal to the market.

BB took prompt steps in implementing the stimulus packages of BDT 1.24 trillion declared by
the Government through its conducive policy measures in credit and refinance facilities. For
instance, BB instructed the banks to provide agricultural loans at a concessional rate of 4
percent. Also, the advance-to-deposit ratio (ADR) limit for banks was raised by 2 percentage
points to allow them to extend credit facilities. Apart from these measures, BB advised the
MFS providers to expand their operations and coverage to the un-banked people.

Despite notable resilience of the financial system in a pandemic setting, there are further
rooms to strengthen it by turning on some adjustments in several areas. For instance, the

Financial Stability Report 2020 vii

declining growth of private sector credit needs to be revamped meticulously to maintain
higher pace of GDP growth. Maintaining asset quality may remain a challenge for the
banking sector in the near future as the recovery of different sectors might vary.
Reinforcement of the FI sector’s resilience is crucial as the downside risk of this sector might
be the source of vulnerability and contagion in the financial system. Therefore, all the
stakeholders need to work in a well-coordinated manner to overcome these challenges and
to get back the economy in the accelerated trajectory.

Finally, I believe that this report will be able to provide the stakeholders a comprehensive
understanding of the strengths, risks, and vulnerabilities of the financial system of the
country and help them devise preemptive and forward-looking measures. I appreciate the
diligent efforts and dedication of the officials of Financial Stability Department in preparing
this report in a timely and befitting manner.

Abu Farah Md. Nasser

Deputy Governor

viii Financial Stability Report 2020

 TABLE OF CONTENTS
ACRONYMS XXI
EXECUTIVE SUMMARY XXVII
CHAPTER 1 : MACROECONOMIC DEVELOPMENTS 1
1.1 GLOBAL MACRO-FINANCIAL ENVIRONMENT 1
1.1.1 Global Macroeconomic Environment 2
1.1.2 Global Financial Market Environment 3
1. 2 DOMESTIC MACROECONOMIC DEVELOPMENT 6
1.2.1 GDP Growth 6
1.2.2 Domestic Credit from Banking System 6
1.2.3 Credit to GDP Gap 7
1.2.4 Inflation 7
1.3 EXTERNAL SECTOR DEVELOPMENTS 8
1.3.1 Exports and Imports 8
1.3.2 Remittance 10
1.3.3 Current Account Balance (CAB) 11
1.3.4 Exchange Rate Movement 12
1.3.5 Capital Flow Movement 12
1.3.6 External Sector Debt 13
1.3.7 Debt Sustainability and External Sector's Stability 14
1.4 MAPPING FINANCIAL STABILITY 15
CHAPTER 2 : BANKING SECTOR’S PERFORMANCE 19
2.1 FINANCIAL SYSTEM OF BANGLADESH 19
2.2 ASSET STRUCTURE OF THE BANKING SECTOR 21
2.3 NONPERFORMING LOANS, PROVISIONS, WRITTEN-OFF LOANS
AND ADVANCES IN THE BANKING SECTOR 24
2.4 RESCHEDULED ADVANCES 30
2.5 LIABILITY STRUCTURE OF THE BANKING SECTOR 34
2.6 BANKING SECTOR DEPOSIT SAFETY NET 37
2.7 BANKING SECTOR PROFITABILITY 40
2.8 CAPITAL ADEQUACY 42
2.9 LEVERAGE RATIO 44
2.10 INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) 45
2.11 BANKING SECTOR LIQUIDITY 46
2.12 PERFORMANCE OF BRANCHES OF LOCAL BANKS OPERATING ABROAD 47
2.12.1 Assets Structure of Overseas Branches 48
2. 12.2 Liabilities Structure of Overseas Branches 48
2.12.3 Profitability of Overseas Branches 49
2.12.4 Risks From Overseas Banking Operation 49
2.13 ISLAMIC BANKING 49
2.13.1 Growth of Islamic Banking 50
2.13.2 Market Share of Islamic Banks 50
2.13.3 Capital Position of Islamic Banks 51
2.13.4 Asset Quality of Islamic Banks 52
2.13.5 Profitability of Islamic Banks 53
2.13.6 Islamic Banks’ Liquidity 55
2.13.7 Remittance Mobilization by the Islamic Banks 57
2.14 PERFORMANCE OF NEW BANKS 58

Financial Stability Report 2020 ix

CHAPTER 3 : BANKING SECTOR RISKS 61
3.1 OVERALL RISK PROFILE OF THE BANKING SECTOR 61
3.2 OVERALL RISK STRUCTURE IN BANKS 62
3.3 CREDIT RISK STRUCTURE IN BANKS 63
3.4 MARKET RISK STRUCTURE IN BANKS 63
3.4.1 Interest Rate Risk (IRR) 64
3.4.2 Equity Price Risk 65
3.4.3 Exchange Rate Risk 65
3.5 OPERATIONAL RISK 66
3.6 SECTORAL EXPOSURES AND RISK 66
3.7 CREDIT RISK MITIGANTS 67
CHAPTER 4 : BANK AND FI RESILIENCE 69
4.1 BANKING SECTOR RESILIENCE 69
4.1.1 Stress on Capital due to credit risk 69
4.1.2 Liquidity Risk Management 72
4.1.3 Sensitivity to Market Risk 72
4.1.4 Calculation of Combined stress test 73
4.1.5 Banking Sector Resilience at a Glance 73
4.2 RESILIENCE OF THE FINANCIAL INSTITUTIONS 74
CHAPTER 5 : FINANCIAL INSTITUTIONS’ PERFORMANCE 77
5.1 PERFORMANCE OF FIs 77
5.1.1 Sources of Fund 77
5.1.2 Assets Composition 78
5.1.3 Liability-Asset Ratio 79
5.1.4 Asset Quality 80
5.1.5 Profitability 80
5.2 CAPITAL ADEQUACY 81
5.3 LIQUIDITY 81
CHAPTER 6 : MONEY AND CAPITAL MARKET 83
6.1 MONEY MARKET 83
6.1.1 Repo with Bangladesh Bank 84
6.1.2 Interbank Repo 84
6.1.3 Interbank Call Money And Interbank Deposit Market 85
6.2 BOND MARKET 85
6.3 CAPITAL MARKET 87
6.3.1 Major Index and Market Capitalization 87
6.3.2 Daily Average Turnover 88
6.3.3 Market Capitalization Decomposition 89
6.3.4 Price-Earnings (P/E) Ratio 90
6.3.5 Initial Public Offering (IPO), Right Share and Bonus Share 90
6.3.6 Dividend and Yield 90
6.3.7 Interlink Between Banking Sector and Stock Market 91
CHAPTER 7 : FINANCIAL INFRASTRUCTURE 93
7.1 ELECTRONIC BANKING OPERATIONS 93
7.2 NATIONAL PAYMENT SWITCH BANGLADESH (NPSB) 94
7.3 BANGLADESH AUTOMATED CLEARING HOUSE (BACH) 95
7.3.1 Bangladesh Automated Cheque Processing System (BACPS) 95
7.3.2 Bangladesh Electronic Funds Transfer Network (BEFTN) 96

x Financial Stability Report 2020

 7.4 REAL TIME GROSS SETTLEMENT (RTGS) SYSTEM 96
7.5 MOBILE FINANCIAL SERVICES (MFS) 96
7.6 CENTRAL DEPOSITORY SYSTEM 98
7.7 PAYMENT SYSTEM OVERSIGHT 98
7.8 INITIATIVES TAKEN DURING CY20 99
CHAPTER 8 : FOREIGN EXCHANGE MARKET 101
8.1 FOREIGN EXCHANGE ASSETS AND LIABILITIES 101
8.2 FOREIGN EXCHANGE CONTINGENT LIABILITIES 102
8.3 INTERBANK (LOCAL) FX TURNOVER 102
8.4 ADEQUACY OF FX RESERVES 103
8.5 WAGE EARNERS' REMITTANCE 105
8.6 EXCHANGE RATE MOVEMENT 105
8.7 MOVEMENT OF REAL EFFECTIVE EXCHANGE RATE (REER) 106
8.8 OPENING AND SETTLEMENT OF LETTER OF CREDIT (L/C) 106
8.9 INTERVENTION IN FX MARKET BY BB 107
CHAPTER 9 : INSURANCE SECTOR IN BANGLADESH 109
9.1 INSURANCE SECTOR DEVELOPMENT: PENETRATION AND DENSITY 109
9.2 PREMIUM GROWTH AND ASSET SIZE 110
9.3 PERFORMANCE AND SOUNDNESS OF GENERAL INSURANCE SECTOR 111
9.4 COMPARISON AMONG DIFFERENT CATEGORIES OF GENERAL INSURANCE 112
9.5 PERFORMANCE AND SOUNDNESS OF LIFE INSURANCE SECTOR 113
9.6 CONCENTRATION IN INSURANCE SECTOR 114
9.7 INTERCONNECTEDNESS BETWEEN INSURANCE AND OTHER SECTORS 114
CHAPTER 10 : MICROFINANCE INSTITUTIONS (MFIS) 117
10.1 OUTLOOK OF MICROFINANCE SECTOR 117
10.2 LOAN STRUCTURE 119
10.3 SOURCES OF FUNDS AND ITS COMPOSITION 121
10.4 FINANCIAL SUSTAINABILITY OF MFIs 122
CHAPTER 11 : DEVELOPMENTS IN THE FINANCIAL SYSTEM 125
11.1 ASSESSMENT OF FINANCIAL STABILITY BY BANGLADESH BANK 125
11.2 REGULATIONS AND POLICIES FOR BANKING SECTOR 125
11.3 POLICIES FOR NON- BANK FINANCIAL INSTITUTIONS (NBFIs) 127
11.4 CHANGES IN MONETARY POLICY 128
11.5 DEVELOPMENTS IN AGRICULTURAL AND RURAL CREDIT 129
11.6 DEVELOPMENTS IN COTTAGE, MICRO, SMALL AND MEDIUM
ENTERPRISE (CMSME) FINANCING 130
11.7 DEVELOPMENTS IN FOREIGN EXCHANGE REGULATIONS/TRANSACTIONS 131
11.8 PROGRESS IN PAYMENT SYSTEMS 134
11.9 DEVELOPMENTS IN OFF-SITE SUPERVISION 136
11.10 POLICY AND ACTIONS TAKEN ON DEBT MANAGEMENT 136
11.11 POLICIES FOR SUSTAINABLE FINANCE 137
11.12 INITIATIVES FOR FINANCIAL INCLUSION 138
11.13 BFIU’S INITIATIVES TO MAINTAIN THE STABILITY OF THE FINANCIAL SYSTEM 138
11.14 DEVELOPMENT IN CREDIT INFORMATION 138
11.15 SECURITIES LAWS/ORDER/NOTIFICATION/DIRECTIVE/GUIDELINE ISSUED BY
BANGLADESH SECURITIES AND EXCHANGE COMMISSION (BSEC) 139
11.16 DEVELOPMENTS IN MICRO CREDIT OPERATIONS 140
11.17 DEVELOPMENTS IN INSURANCE SECTOR 140
APPENDIX 141

Financial Stability Report 2020 xi

 LIST OF CHARTS
CHART 1.1: SHARE OF WORLD GDP IN 2020 2
CHART 1.2: WORLD GDP GROWTH 2
CHART 1.3: GDP GROWTH OF TOP IMPORT ORIGINATING COUNTRIES 3
CHART 1.4: GDP GROWTH OF TOP EXPORT DESTINATION COUNTRIES 3
CHART 1.5: GDP GROWTH OF TOP 5 REMITTANCE SOURCING COUNTRIES 3
CHART 1.6: MOVEMENT OF MAJOR GLOBAL STOCK MARKET INDICES 4
CHART 1.7: YIELD OF 10-YEAR GOVERNMENT BONDS OF MAJOR ECONOMIES 4
CHART 1.8: CRUDE OIL PRICE (WTI)* 5
CHART 1.9: US FED FUNDS TARGET RANGE (UPPER LIMIT) 5
CHART 1.10: GROSS VALUE ADDED (GVA) OF BANGLADESH 6
CHART 1.11: GDP GROWTH OF SELECTED ASIAN ECONOMIES 6
CHART 1.12: DOMESTIC CREDIT FROM BANKING SYSTEM-COMPONENTS’ SHARE AND GROWTH 6
CHART 1.13: CREDIT-TO-GDP RATIO-ITS TREND AND THE GAP 7
CHART 1.14: INFLATION AND ITS COMPONENTS. 8
CHART 1.15: 12-MONTH AVERAGE CPI INFLATION 8
CHART 1.16: EXPORT AND IMPORT TREND OF BANGLADESH 8
CHART 1.17: EXPORTS OF BANGLADESH 9
CHART 1.18: REGION-WISE EXPORT GROWTH OF RMG 9
CHART 1.19: IMPORTS OF BANGLADESH FROM MAJOR PARTNERS 10
CHART 1.20: COMMODITY-WISE IMPORTS OF BANGLADESH 10
CHART 1.21: REMITTANCE INFLOWS 10
CHART 1.22: BLOC-WISE REMITTANCE GROWTH 11
CHART 1.23: REMITTANCE FROM MAJOR COUNTRIES 11
CHART 1.24: TRENDS OF CURRENT ACCOUNT BALANCE 11
CHART 1.25: CURRENT ACCOUNT BALANCE-TO-GDP RATIO OF BANGLADESH 11
CHART 1.26: EXCHANGE RATE INDICES 12
CHART 1.27: APP(+)/DEP(-) OF CURRENCY AGAINST USD IN 2020 12
CHART 1.28: NET FDI INFLOW 12
CHART 1.29: MAJOR COUNTRY-WISE FDI STOCK 12
CHART 1.30: GROSS, SHORT AND LONG-TERM EXTERNAL DEBTS 13
CHART 1.31: EXTERNAL DEBT TO GDP RATIO INNEIGHBORING COUNTRIES (CY20) 13
CHART 1.32: SECTOR-WISE EXTERNAL DEBT OF BANGLADESH 13
CHART 1.33: FINANCIAL STABILITY MAP (2019 AND 2020) 16
CHART 2.1: TOTAL ASSET GROWTH: YEAR OVER YEAR BASIS 21
CHART 2.2: ASSET GROWTH OF BANKING CLUSTERS 21
CHART 2.3: YEAR-WISE BANKING SECTOR ASSET STRUCTURE 22
CHART 2.4: YEAR-WISE GROWTH OF LOANS AND ADVANCES AND INVESTMENT IN SECURITIES 22
CHART 2.5 SHARE OF EARNING ASSETS OF DIFFERENT CATEGORIES OF BANKS 23
CHART 2.6: SHARE OF LIQUID ASSETS OF DIFFERENT CATEGORIES OF BANKS 23
CHART 2.7: TOP 5 AND TOP 10 BANKS BASED ON ASSET SIZE 23
CHART 2.8: GROSS NPL OF BANKING INDUSTRY 25
CHART 2.9: GROSS NPL OF BANKING CLUSTERS (DEC, 2019 AND DEC, 2020) 25
CHART 2.10: GROSS NPL RATIO OF INDIVIDUAL BANK (END-DECEMBER 2020) 25
CHART 2.11: GROSS NPL RATIO OF BANKS INTO DIFFERENT BUCKETS 26
CHART 2.12: GROSS AND NET NPL RATIO IN CY20 26
CHART 2.13: NET NPL RATIO OF BANKING CLUSTERS (DEC, 2019 AND DEC, 2020) 26

xii Financial Stability Report 2020

CHART 2.14: YEAR-WISE BANKING SECTOR LOAN LOSS PROVISIONS 27
CHART 2.15: TOP 5 AND TOP 10 BANKS BY GROSS NPL SIZE 27
CHART 2.16: GROSS NPL COMPOSITION IN CY20 29
CHART 2.17: YEAR-WISE RATIOS OF THE THREE CATEGORIES OF NPLS 29
CHART 2.18: RESCHEDULED LOAN RATIO TREND 31
CHART 2.19: TREND OF RESCHEDULED LOAN 31
CHART 2.20: SECTOR-WISE RESCHEDULED LOAN COMPOSITION 31
CHART 2.21: SECTOR-WISE RESCHEDULED LOAN RATIO 31
CHART 2.22: SECTOR-WISE NON-PERFORMING RESCHEDULED LOAN RATIO 32
CHART 2.23: INDUSTRY-WISE RESCHEDULED LOAN COMPOSITION 32
CHART 2.24: INDUSTRY-WISE RESCHEDULED LOAN RATIO 32
CHART 2.25: INDUSTRY-WISE NON-PERFORMING RESCHEDULED LOAN RATIO 33
CHART 2.26: BANK CLUSTER-WISE RESCHEDULED LOAN COMPOSITION 33
CHART 2.27: BANK CLUSTER-WISE RESCHEDULED LOAN RATIO 33
CHART 2.28: TOP 5 AND TOP 10 BANKS BY RESCHEDULED LOAN SIZE 33
CHART 2.29: DISTRIBUTION OF BANKS BY RESCHEDULED LOAN RATIO 34
CHART 2.30: YEAR-WISE BANKING SECTOR LIABILITY STRUCTURE 35
CHART 2.31: YEAR-WISE GROWTH OF DEPOSITS AND BORROWINGS FROM BANKS
AND FIS (UPDATED CHART) 35
CHART 2.32: YEAR-WISE LOANS AND DEPOSIT GROWTH 36
CHART 2.33: LOANS AND DEPOSITS OUTSTANDING 36
CHART 2.34: GROWTH OF LOANS AND ADVANCES AND DEPOSITS BY BANK CLUSTERS 36
CHART 2.35: BANKING SECTOR’S DEPOSIT SHARE BY TYPES OF ACCOUNTS 36
CHART 2.36: TOP 5 AND TOP 10 BANKS BASED ON SIZE OF DEPOSIT 37
CHART 2.37: OFF-BALANCE SHEET ASSET TO ON-BALANCE SHEET ASSET RATIO 37
CHART 2.38: SAFETY NET ON BANKING SECTOR DEPOSITS 38
CHART 2.39: PROTECTION OF DEPOSITORS ON ENHANCEMENT OF INSURED
DEPOSIT COVERAGE LEVEL 39
CHART 2.40: BANKING SECTOR RETURN ON ASSET (ROA) 40
CHART 2.41: BANKING SECTOR RETURN ON EQUITY (ROE) 40
CHART 2.42: NET INTEREST MARGIN BY BANK GROUPS 41
CHART 2.43: NON-INTEREST EXPENSE TO GROSS OPERATING INCOME RATIO 41
CHART 2.44: BANKING SECTOR INCOME BY SOURCES 41
CHART 2.45: BANKING SECTOR MONTHLY WEIGHTED AVERAGE OVERALL
INTEREST RATE SPREAD 42
CHART 2.46: BANK CATEGORY-WISE MONTHLY WEIGHTED AVERAGE
INTEREST RATE SPREAD FOR CY20 42
CHART 2.47: ASSET SHARE OF BANKS BY CRAR AT END-DEC 2020 43
CHART 2.48: YEAR-WISE CRAR, CRAR COMPLIANT BANKS AND THEIR ASSET SHARE 43
CHART 2.49: YEAR-WISE TIER-1 CAPITAL RATIO OF BANKS 43
CHART 2.50: CRAR BY BANKING GROUP AT END-DEC 2019 AND 2020 43
CHART 2.51: CCB BY BANKING GROUP AT END-DEC 2019 AND 2020 44
CHART 2.52: YEAR-WISE LEVERAGE RATIO OF BANKS 45
CHART 2.53: YEAR-WISE DISTRIBUTION OF BANKS’ LEVERAGE RATIO 45
CHART 2.54: MONTHLY ADR AND CALL MONEY BORROWING RATE 46
CHART 2.55: BANKS’ CLUSTER-WISE ADR 46
CHART 2.56: DISTRIBUTION OF BANKS IN TERMS OF ADR 46
CHART 2.57: BANKS’ CLUSTER-WISE MONTHLY LCR 47

Financial Stability Report 2020 xiii

CHART 2.58: BANKS’ CLUSTER-WISE QUARTERLY NSFR 47
CHART 2.59: CHANGE IN ASSET COMPOSITION OF BANK BRANCHES OPERATING IN ABROAD 48
CHART 2.60: LIABILITIES COMPOSITION OF BANKS IN OPERATING IN ABROAD 48
CHART 2.61: PERFORMANCE MAP OF ISLAMIC BANKING END-DECEMBER 2020 49
CHART 2.62: TRENDS OF ISLAMIC BANKING INVESTMENT, DEPOSITS, LIABILITIES, AND ASSETS 50
CHART 2.63: TRENDS OF ISLAMIC BANKING NET PROFIT AND EQUITY 50
CHART 2.64: MARKET SHARE OF ISLAMIC BANKS AND THE CONVENTIONAL BANKS IN CY20 51
CHART 2.65: AGGREGATE CRAR OF ISLAMIC BANKS 51
CHART 2.66: DISTRIBUTION OF ISLAMIC BANKS IN MAINTAINING CRAR 51
CHART 2.67: AGGREGATE LEVERAGE RATIO OF ISLAMIC BANKS 52
CHART 2.68: DISTRIBUTION OF ISLAMIC BANKS IN MAINTAINING LEVERAGE RATIO 52
CHART 2.69: CLASSIFIED INVESTMENT, NET CLASSIFIED INVESTMENT
AND RESCHEDULED LOAN (CY19 & CY20) 52
CHART 2.70: DISTRIBUTION OF ISLAMIC BANKS BY GNPL, NNPL
AND URSDL RATIO (CY19 & CY20) 52
CHART 2.71: ISLAMIC BANKING SECTOR RETURN ON ASSET (ROA) 53
CHART 2.72: DISTRIBUTION OF ISLAMIC BANKS BY ROA 53
CHART 2.73: ISLAMIC BANKING SECTOR RETURN ON EQUITY (ROE) 54
CHART 2.74: DISTRIBUTION OF ISLAMIC BANKS BASED ON ROE 54
CHART 2.75: ISLAMIC BANKING SECTOR RETURN ON EQUITY (ROE) 54
CHART 2.76: LCR MAINTAINED BY CONVENTIONAL BANKS AND ISLAMIC BANKS 56
CHART 2.77: ISLAMIC BANK-WISE LCR MAINTENANCE SCENARIO 56
CHART 2.78: NSFR MAINTAINED BY CONVENTIONAL BANKS AND ISLAMIC BANKS 56
CHART 2.79: ISLAMIC BANK-WISE NSFR MAINTENANCE SCENARIO 56
CHART 2.80: IDR (ADR) OF ISLAMIC BANKING* AND THE OVERALL BANKING SECTOR 57
CHART 2.81: DISTRIBUTION OF ADR (IDR) OF ISLAMIC BANKS 57
CHART 2.82: SHARE OF REMITTANCES COLLECTED BY THE ISLAMIC BANKS 57
CHART 2.83: REMITTANCES COLLECTION BY INDIVIDUAL ISLAMIC BANK IN 2020 57
CHART 2.84: COMPARISON OF ROA AND ROE IN 2020 58
CHART 2.85: COMPARISON BY SOURCES OF INCOME IN 2020 58
CHART 2.86: CRAR OF NEW BANKS 59
CHART 3.1: TRENDS OF RISK-WEIGHTED ASSET DENSITY RATIO 62
CHART 3.2: OVERALL RISK AND CREDIT RISK STRUCTURE 62
CHART 3.3: MARKET RISK COMPOSITION 64
CHART 3.4: BANKS' EXPOSURES TO CORPORATE AND BANKS & NBFIS 68
CHART 4.1: PROBABLE NPL RATIO AFTER MINOR SHOCK 70
CHART 4.2: STRESS TESTS: MINOR SHOCK ON DIFFERENT CREDIT RISK FACTORS 72
CHART 4.3: STRESS TESTS: MINOR SHOCK ON DIFFERENT CREDIT RISK FACTORS (WITH CCB) 72
CHART 4.4: ANKING SECTOR RESILIENCE IN DIFFERENT SHOCK
SCENERIOS (AT MINOR LEVEL SHOCK) 74
CHART 4.5: STRESS TESTS ON FINANCIAL INSTITUTIONS 75
CHART 5.1: FIS’ BORROWINGS, DEPOSITS AND EQUITY TREND 78
CHART 5.2: FIS’ ASSET COMPOSITION 78
CHART 5.3: FIS’ TOTAL ASSET TO GDP RATIO 78
CHART 5.4: LIABILITY-ASSET RATIO OF FI INDUSTRY 80
CHART 5.5: FIS’ CLASSIFIED LOANS AND LEASES 80
CHART 5.6: FIS’ LOAN LOSS PROVISIONING 80
CHART 5.7: FIS’ TREND OF INCOME AND EXPENSE 81

xiv Financial Stability Report 2020

CHART 5.8: FIS’ PROFITABILITY TREND 81
CHART 5.9: FIS’ CAPITAL ADEQUACY RATIO (CAR) 81
CHART 5.10: FIS’ CRR AND SLR 82
CHART 6.1: VOLUME OF T-BILLS ISSUANCE IN 2020 83
CHART 6.2: MONTHLY TURNOVER OF REPO, SPECIAL REPO,LSF, AND REVERSE REPO IN 2020 84
CHART 6.3: INTERBANK REPO TURNOVER AND INTERBANK REPO RATE IN 2020 84
CHART 6.4: CALL BORROWING VOLUME AND MONTHLY WEIGHTED
AVERAGE CALL MONEY RATE IN 2020 85
CHART 6.5: VOLUME OF TREASURY SECURITIES AUCTION
SALES – MANDATORY DEVOLVEMENT, 2020 86
CHART 6.6: MONTHLY VOLUME OF SECONDARY TRADE 86
CHART 6.7: DSEX INDEX AND MARKET CAPITALIZATION IN 2020 88
CHART 6.8: DSEX (CY-2013 TO CY-2020) 88
CHART 6.9: MARKET CAPITALIZATION TO GDP RATIO 88
CHART 6.10: YEAR-WISE DAILY AVERAGE TURNOVER 89
CHART 6.11: MONTH-WISE DAILY AVERAGE TURNOVER OF 2020 89
CHART 6.12: DECOMPOSITION OF MCAP (DEC- 2019) 89
CHART 6.13: DECOMPOSITION OF MCAP (DEC- 2020) 89
CHART 6.14: MARKET PRICE EARNINGS RATIO 90
CHART 6.15: CAPITAL INCREASED BY THE SECURITIES TRADED AT DSE 90
CHART 6.16: SCHEMATIC VIEW OF INTER-LINKAGE BETWEEN BANKS AND CAPITAL MARKET 91
CHART 6.17: TREND IN CAPITAL MARKET EXPOSURES (SOLO) OF BANKS 92
CHART 6.18: TREND IN CAPITAL MARKET EXPOSURES (CONSOLIDATED) OF BANKS 92
CHART 6.19: MAJOR SECTORS’ MARKET CAPITALIZATION IN DSE 92
CHART 7.1: TOTAL VOLUME OF ELECTRONIC BANKING TRANSACTION 94
CHART 7.2: AUTOMATED CHEQUE CLEARING OPERATIONS 95
CHART 7.3: CATEGORY-WISE SHARE OF TRANSACTIONS OF MFS IN CY20 97
CHART 7.4: GROWTH OF MFS 98
CHART 8.1: YEAR-WISE FX ASSETS AND LIABILITIES 101
CHART 8.2: COMPONENTS OF FX CONTINGENT LIABILITIES (END-DECEMBER 2020) 102
CHART 8.3: COMPONENTS OF INTERBANK FX TURNOVER (CY20) 102
CHART 8.4: ANNUAL FX TURNOVER 103
CHART 8.5: MONTHLY FX TURNOVER (CY20) 103
CHART 8.6: FX NET OPEN POSITION (CY20) 103
CHART 8.7: IMPORT COVERAGE OF FX RESERVE 104
CHART 8.8: RESERVES TO M2 RATIO 104
CHART 8.9: SHORT-TERM EXTERNAL DEBT TO RESERVE RATIO 104
CHART 8.10: RESERVES ADEQUACY MEASURES FOR BANGLADESH 104
CHART 8.11: WAGE EARNERS’ REMITTANCE 105
CHART 8.12: EXCHANGE RATE MOVEMENT (BDT/USD) 105
CHART 8.13: REER MOVEMENT 106
CHART 8.14: L/C OPENING 106
CHART 8.15: L/C SETTLEMENT 106
CHART 8.16: INTERVENTION IN FX MARKET BY BANGLADESH BANK 107
CHART 8.17: NDA, NFA, RM AND M2 MOVEMENT 107
CHART 9.1: INSURANCE PENETRATION 110
CHART 9.2: INSURANCE DENSITY RATIO 110
CHART 9.3: TREND IN GROSS PREMIUM AND ITS GROWTH 110

Financial Stability Report 2020 xv

CHART 9.4: TREND IN INSURANCE SECTOR ASSET 110
CHART 9.5: SHARE OF INSURANCE SECTOR’S TOTAL ASSET 111
CHART 9.6: ASSET STRUCTURE OF LIFE AND GENERAL INSURANCE COMPANIES (CY-20) 111
CHART 9.7: GROSS AND NET PREMIUM BY BUSINESS 112
CHART 9.8: RISK RETENTION RATE BY BUSINESS 112
CHART 9.9: CLAIMS PAID & UNDERWRITING BY BUSINESS (CY20) 113
CHART 9.10: UNDERWRITING PROFIT BY BUSINESS (CY20) 113
CHART 9.11: INVESTMENT PORTFOLIO OF LIFE INSURANCE 115
CHART 9.12: INVESTMENT PORTFOLIO OF GENERAL INSURANCE 115
CHART 9.13: FIXED DEPOSIT AS A PERCENT OF TOTAL ASSETS (CY-20) 115
CHART 9.14: INSURANCE SECTOR’S YEAR-END MARKET CAPITALIZATION IN DSE 115
CHART 10.1: NUMBER OF LICENSED INSTITUTIONS, BRANCHES, EMPLOYEES AND MEMBERS 118
CHART 10.2: SAVINGS AND LOAN SCENARIO OF MFIS SECTOR 118
CHART 10.3: TREND OF SECTOR OUTREACH 118
CHART 10.4: BORROWERS-TO-MEMBERS RATIO 118
CHART 10.5: AVERAGE LOANS AND SAVINGS PER INSTITUTION 119
CHART 10.6: AVERAGE LOANS AND SAVINGS PER BRANCH 119
CHART 10.7: AVERAGE LOAN PER BORROWER AND SAVINGS PER MEMBER 119
CHART 10.8: STRUCTURE OF MEMBERSHIP 119
CHART 10.9: OUTSTANDING LOAN STRUCTURE IN FY20 120
CHART 10.10: OUTSTANDING LOAN STRUCTURAL TREND 120
CHART 10.11: LOAN RECIPIENTS’ COMPOSITION IN FY20 120
CHART 10.12: LOAN RECIPIENTS’ COMPARISON BETWEEN FY19 AND FY20 120
CHART 10.13: NON-PERFORMING LOAN RATIO 121
CHART 10.14: TREND OF NON-PERFORMING LOAN 121
CHART 10.15: TOTAL FUND OF MFIS 121
CHART 10.16: MAJOR SOURCES OF FUND IN FY20 122
CHART 10.17: TREND OF MAJOR SOURCES OF FUND 122
CHART 10.18: OPERATIONAL SUSTAINABILITY 122
CHART 10.19: FINANCIAL DEPENDENCY 122
CHART 10.20: CONCENTRATION OF MFI SECTOR IN TERMS OF LOANS,
SAVINGS AND MEMBERS HELD BY TOP 10 123
CHART 10.21: CONCENTRATION OF MFI SECTOR IN TERMS OF LOANS,
SAVINGS AND MEMBERS HELD BY TOP 20 123

xvi Financial Stability Report 2020

 LIST OF TABLES
TABLE 1.1: POLICY RATE CUTS IN COUNTRIES 5
TABLE 1.2: SHARE OF PUBLIC AND PRIVATE SECTORS DEBTS-BY SHORT TERM AND LONG-TERM 14
TABLE 1.3: DEBT SUSTAINABILITY AND STABILITY INDICATORS FOR EXTERNAL SECTOR 15
TABLE 2.1: FINANCIAL SYSTEM STRUCTURE OF BANGLADESH 20
TABLE 2.2: SECTOR-WISE LOAN CONCENTRATION (CY20) 24
TABLE 2.3: SECTOR-WISE NONPERFORMING LOANS DISTRIBUTION (CY20) 28
TABLE 2.4: DEPOSIT INSURANCE TRUST FUND AND ITS COMPOSITION 38
TABLE 2.5: COMPARISON OF CAPITAL ADEQUACY OF THE NEIGHBORING COUNTRIES 44
TABLE 3.1: GROUPING OF BANKS FOR RISK ANALYSIS 61
TABLE 3.2: RISK-WEIGHTED ASSET DENSITY RATIO (BANK GROUPS) 62
TABLE 3.3: CREDIT RISK IN THE BANKING INDUSTRY UNDER BASEL III (END-DECEMBER 2020) 63
TABLE 3.4: GROUP-WISE DISSECTION OF CREDIT RISK IN THE BANKING SYSTEM (DECEMBER 2020) 63
TABLE 3.5: GROUP-WISE DISSECTION OF MARKET RISK IN THE BANKING SYSTEM 64
TABLE 3.6: INTEREST RATE RISK IN THE BANKING SYSTEM 65
TABLE 3.7: EQUITY PRICE RISK IN THE BANKING SYSTEM 65
TABLE 3.8: EXCHANGE RATE RISK IN THE BANKING SYSTEM 66
TABLE 3.9: OPERATIONAL RISK UNDER BASEL III IN THE BANKING INDUSTRY 66
TABLE 3.10: GROUP-WISE DISSECTION OF OPERATIONAL RISK IN THE BANKING SYSTEM 66
TABLE 3.11: SECTORAL EXPOSURES OF BANKS AND RISKS (END-DECEMBER 2020) 67
TABLE 4.1: CAPITAL ADEQUACY SCENARIO OF THE BANKING SECTOR 69
TABLE 4.2: STRESS TESTS FOR CREDIT RISK: INCREASE IN NPLS 70
TABLE 4.3: STRESS TESTS FOR CREDIT RISK: DEFAULT OF TOP LARGE BORROWERS 70
TABLE 4.4: STRESS TESTS FOR CREDIT RISK: INCREASE IN NPLS OF THE HIGHEST EXPOSED SECTOR 70
TABLE 4.5: STRESS TESTS FOR CREDIT RISK: FALL IN THE FSV OF MORTGAGED COLLATERAL 71
TABLE 4.6: STRESS TESTS FOR CREDIT RISK: NEGATIVE SHIFT IN NPL CATEGORIES 71
TABLE 4.7: STRESS TESTS: INTEREST RATE RISK 73
TABLE 4.8: STRESS TESTS: EXCHANGE RATE RISK 73
TABLE 4.9: STRESS TESTS: EQUITY PRICE RISK 73
TABLE 4.10: STRESS TESTS: COMBINED SHOCK 73
TABLE 5.1: FIs‘ SECTOR-WISE LOANS AND LEASES AS OF END-DECEMBER 2020 79
TABLE 6.1: VOLUME OF T-BONDS AUCTION SALES IN 2020 85
TABLE 6.2: COMPARISON OF DIVIDEND AND YIELD (2017-2020) 91
TABLE 7.1: ONLINE BANKING SCENARIO 94
TABLE 7.2: THE GROWTH OF TRANSACTIONS THROUGH MFS 97
TABLE 9.1: PERFORMANCE AND SOUNDNESS INDICATORS-GENERAL/ NON-LIFE INSURANCE 112
TABLE 9.2: PERFORMANCE AND SOUNDNESS INDICATORS-LIFE INSURANCE 113
TABLE 9.3: CONCENTRATION OF ASSET AND PREMIUM IN INSURANCE COMPANIES (CY20) 114
TABLE 10.1: SELECTED INDICATORS OF MICROFINANCE SERVICES 117

Financial Stability Report 2020 xvii

 LIST OF BOXES
BOX 2.1: PROCEDURE OF WRITING OFF OF LOANS/INVESTMENTS OF BANKS 29
BOX 2.2: THE CAPACITY OF EXISTING DITF AND ITS FORECAST 39
BOX 2.3: COMPOSITE FINANCIAL STABILITY INDEX (CFSI): DECEMBER 2020 59
BOX 6.1: YIELD CURVE 87

xviii Financial Stability Report 2020

 LIST OF APPENDICES
APPENDIX I: WORLD GDP GROWTH 141
APPENDIX II: GDP GROWTH OF TOP 5 IMPORT ORIGINATING COUNTRIES 141
APPENDIX III: GDP GROWTH OF TOP 5 EXPORT DESTINATION COUNTRIES 141
APPENDIX IV: GDP GROWTH OF TOP 5 REMITTANCE GENERATING COUNTRIES 141
APPENDIX V: YIELD OF 10-YEAR GOVERNMENT BOND OF MAJOR ECONOMIES 142
APPENDIX VI: GROSS VALUE ADDED (GVA) OF BANGLADESH AT CONSTANT PRICE 142
APPENDIX VII: DOMESTIC CREDIT 142
APPENDIX VIII: WORKERS’ REMITTANCE BY MAJOR COUNTRIES 143
APPENDIX IX: BANKING SECTOR AGGREGATE BALANCE SHEET 144
APPENDIX X: BANKING SECTOR AGGREGATE SHARE OF ASSETS 145
APPENDIX XI: BANKING SECTOR AGGREGATE SHARE OF LIABILITIES 145
APPENDIX XII: BANKING SECTOR AGGREGATE INCOME STATEMENT 146
APPENDIX XIII: BANKING SECTOR ASSETS, DEPOSITS & NPL CONCENTRATION (CY20) 146
APPENDIX XIV: BANKING SECTOR LOAN LOSS PROVISIONS 146
APPENDIX XV: BANKING SECTOR YEAR-WISE GROSS NPL RATIO & ITS COMPOSITION 147
APPENDIX XVI: BANKING SECTOR NPL COMPOSITION (CY20) 147
APPENDIX XVII: BANKING SECTOR DEPOSITS BREAKDOWN EXCLUDING
INTERBANK DEPOSIT (CY20) 147
APPENDIX XVIII: BANKING SECTOR SELECTED RATIOS 148
APPENDIX XIX: BANKING SECTOR ROA & ROE 148
APPENDIX XX: BANKING SECTOR CAPITAL TO RISK-WEIGHTED ASSETS RATIO
(CRAR) - SOLO BASIS (CY20) 148
APPENDIX XXI: BANKING SECTOR YEAR-WISE ADR AT END-DECEMBER 148
APPENDIX XXII: BANKING SECTOR ADR (CY20) 149
APPENDIX XXIII: YEAR-WISE BANKING SECTOR LCR AND NSFR AT END-DECEMBER 149
APPENDIX XXIV: BANKING SECTOR LEVERAGE RATIO - SOLO BASIS (CY20) 149
APPENDIX XXV: ISLAMIC BANKS' AGGREGATE BALANCE SHEET 150
APPENDIX XXVI: ISLAMIC BANKS' AGGREGATE INCOME STATEMENT 151
APPENDIX XXVII: SHARE OF ISLAMIC BANKS IN THE BANKING SECTOR (CY20) 151
APPENDIX XXVIII: SELECTED RATIOS OF ISLAMIC BANKS AND THE BANKING SECTOR (CY20) 152
APPENDIX XXIX: ISLAMIC BANKS’ CRAR (CY20) 152
APPENDIX XXX: ISLAMIC BANKS’ LEVERAGE RATIO (CY20) 152
APPENDIX XXXI: ISLAMIC BANK'S INVESTMENT (ADVANCE)-DEPOSIT RATIO
(AS OF END-DECEMBER 2020) 152
APPENDIX XXXII: METHODOLOGY OF PERFORMANCE MAP OF ISLAMIC BANKS 153
APPENDIX XXXIII: OVERSEAS BRANCHES' AGGREGATE SHARE OF ASSETS & LIABILITIES 153
APPENDIX XXXIV: FIs’ AGGREGATE BALANCE SHEET 154
APPENDIX XXXV: FIs’ AGGREGATE INCOME STATEMENT 154
APPENDIX XXXVI: FIs’ LIQUIDITY POSITION 155
APPENDIX XXXVII: FIs’ OTHER INFORMATION 155
APPENDIX XXXVIII: FIs’ SUMMARY PERFORMANCE INDICATORS 155

Financial Stability Report 2020 xix

APPENDIX XXXIX: FIs’ SECTOR-WISE DISTRIBUTION OF LOANS AND LEASES 156
APPENDIX XL: INTERBANK REPO VOLUME, INTERBANK REPO RATE AND CALL MONEY RATE 156
APPENDIX XLI: YIELDS ON TREASURY SECURITIES 156
APPENDIX XLII: EQUITY MARKET DEVELOPMENT 157
APPENDIX XLIII: AUTOMATED CHEQUE CLEARING OPERATIONS 157
APPENDIX XLIV: VOLUME OF ELECTRONIC BANKING TRANSACTIONS 157
APPENDIX XLV: COMPARATIVE SCENARIO OF MOBILE FINANCIAL SERVICES (MFS)
IN LAST 3 YEARS 157
APPENDIX XLVI: BANKING SECTOR MONTH-WISE DEPOSIT & ADVANCE RATE (CY20) 158
APPENDIX XLVII: EXTERNAL CREDIT ASSESSMENT INSTITUTIONS (ECAIS) 158
APPENDIX XLVIII: MICROCREDIT FINANCE SECTOR 159
APPENDIX XLIX: FINANCIAL STABILITY MAP 160
APPENDIX L: LIST OF INDICATORS USED TO PREPARE CFSI 163

xx Financial Stability Report 2020

 ACRONYMS
ACC Anti Corruption Commission
ACD Agricultural Credit Department
ACRL Alpha Credit Rating Limited
ACRSL ARGUS Credit Rating Services Ltd.
ACS Automated Challan System
AD Authorized Dealer
ADR Advance-to-Deposit Ratio
ATDTL Average Total Demand And Time Liabilities
ATM Automated Teller Machine
BACH Bangladesh Automated Clearing House
BACPS Bangladesh Automated Cheque Processing System
BASIS Bangladesh Association of Software & Information Services
BB Bangladesh Bank
BBQ Bangladesh Bank Quarterly
BB RG Bangladesh Bank Risk Grade
BBS Bangladesh Bureau of Statistics
BCBS Basel Committee on Banking Supervision
BDT Bangladeshi Taka
BDRAL The Bangladesh Rating Agency Limited
BEFTN Bangladesh Electronic Funds Transfer Network
BFIU Bangladesh Financial Intelligence Unit
BGMEA Bangladesh Garment Manufacturers and Exporters Association
BHBFC Bangladesh House Building Finance Corporation
BKMEA Bangladesh Knitwear Manufacturers and Exporters Association
BL Bad and Loss
BO Beneficiary Owner
BRPD Banking Regulations and Policy Department
BS Balance Sheet
BSBL Bangladesh Samabaya Bank Limited
BSEC Bangladesh Securities and Exchange Commission
BSI Banking Soundness Index
BTMA Bangladesh Textile Mills Association
CAB Current Account Balance
CAR Capital Adequacy Ratio
CBS Core Banking System
CC Cash Credit
CCB Capital Conservation Buffer
CDBL Central Depository Bangladesh Limited
CFSI Composite Financial Stability Index
CMSME Cottage, Micro, Small and Medium Enterprise
CPI Consumer Price Index
CRAB Credit Rating Agency of Bangladesh Ltd.
CRAR Capital to Risk-weighted Assets Ratio

Financial Stability Report 2020 xxi

CRISL Credit Rating Information and Services Limited
CRR Cash Reserve Ratio
CRSDL Classified Rescheduled Loan
CSE Chittagong Stock Exchange
CSR Corporate Social Responsibility
CY Calendar Year
DF Doubtful
DOS Department of Off-site Supervision
DFIM Department of Financial Institutions and Markets
DFS Digital Financial Services
DID Deposit Insurance Department
DIS Deposit Insurance System
DITF Deposit Insurance Trust Fund
DMD Debt Management Department
DNSB Deferred Net Settlement Batches
DP Depository Participants
DSE Dhaka Stock Exchange
DSEX DSE Broad Index
ECC Export Cash Credit
ECAI External Credit Assessment Institutions
ECRL Emerging Credit Rating Ltd
EDF Export Development Fund
EFT Electronic Fund Transfer
EM Emerging Market
EPS Earnings per Share
ERQ Exporters' Retention Quota
EU European Union
FC Foreign Currency
FCB Foreign Commercial Bank
FDD Foreign Demand Draft
FDI Foreign Direct Investment
FDR Fixed Deposit Receipt
FE/FX Foreign Exchange
FEPD Foreign Exchange Policy Department
FI Financial Institution
FID Financial Inclusion Department
FOB Free On Board
FRTMD Forex Reserve and Treasury Management Department
FSD Financial Stability Department
FSR Financial Stability Report
FSV Forced Sale Value
FVI Financial Vulnerability Index
FY Fiscal Year
GCC Gulf Cooperation Council
GDP Gross Domestic Product

xxii Financial Stability Report 2020

GNPL Gross Non-Performing Loan
GTF Green Transformation Fund
GVA Gross Value Added
GVC Global Value Chain
HHI Herfindahl-Hirschman Index
HV High Value
IBFT Internet Banking Fund Transfer
ICAAP Internal Capital Adequacy Assessment Process
ICB Investment Corporation of Bangladesh
IDR Investment to Deposit Ratio
IDRA Insurance Development and Regulatory Authority
IFC International Finance Corporation
IMF International Monetary Fund
IPO Initial Public Offering
IRR Interest Rate Risk
ISAS Institute of South Asian Studies
IT Information Technology
JBC Jibon Bima Corporation
KSA Kingdom of Saudi Arabia
KYC Know Your Customer
LCAF Letter Of Credit Authorization Form
LCR Liquidity Coverage Ratio
LIBOR London Inter-bank Offered Rate
LIM Loan Against Imported Merchandise
LSF Liquidity support facility
LTR Loan against Trust Receipt
MCR Minimum Capital Requirement
MET Monthly Economic Trends
MFI Microfinance Institution
MFS Mobile Financial Services
MI Market Infrastructure
MOU Memorandum of Understanding
MPD Monetary Policy Department
MRA Microcredit Regulatory Authority
MRWA Market Risk-Weighted Assets
MT Mail Transfer
NCRL National Credit Rating Ltd.
NBFI Non-Bank Financial Institution
NDA Net Domestic Assets
NFA Net Foreign Assets
NFC Non-Financial Corporation
NFCD Non-Resident Foreign Currency Deposit
NFSR Net Stable Funding Ratio
NII Net Interest Income
NIM Net Interest Margin

Financial Stability Report 2020 xxiii

NNII Net Non-Interest Income
NNPL Net Non-Performing Loan
NOP Net Operating Profit
NPL Non-Performing Loan
NPSB National Payment Switch Bangladesh
NSDP National Summary Data Page
NSFR Net Stable Funding Ratio
OBO Operation of Banks
OBS Off-Balance Sheet
OBU Off-shore Banking Unit
OD Overdraft
OECD Organization for Economic Co-operation and Development
ORWA Operational Risk-Weighted Assets
OTC Over the Counter
PC Packing Credit
PCB Private Commercial Bank
PCR Polymerase Chain Reaction
P/E Price-Earnings Ratio
PKSF Palli Karma-Sahayak Foundation
POL Petroleum, Oil and Lubricants
POS Point of sale
PPP Public Private Partnership
PSD Payment Systems Department
PSE Public Service Enterprise
PSO Payment System Operator
PSP Payment Service Provider
QFSAR Quarterly Financial Stability Assessment Report
QR Quick Response
RECI Regional Economic Climate Index
REER Real Effective Exchange Rate
REPO Repurchase Agreement
RFCD Resident Foreign Currency Deposit Accounts
RM Reserve Money
RMG Ready-made Garments
ROA Return on Assets
ROE Return on Equity
ROI Return on Investment
RRR Risk Retention Rate
RSDL Rescheduled Loan
RTGS Real Time Gross Settlement
RV Regular Value
RWA Risk Weighted Assets
SAARC South Asian Association for Regional Cooperation
SB Sonali Bank
SBC Sadharon Bima Corporation

xxiv Financial Stability Report 2020

SOCB State-owned Commercial Bank
SDB Specialized Development Bank
SFD Sustainable Finance Department
SLR Statutory Liquidity Ratio
SMA Special Mention Account
SME Small and Medium Enterprise
SMESPD SME & Special Programmes Department
SREP Supervisory Review Evaluation Process
SREUP Safety Retrofits and Environmental Upgrades
SS Sub-Standard
STD Short-Term External Debt
TT Telegraphic Transfer
TWS Trader Work Station
T-bill Treasury Bill
T-bond Treasury Bond
UAE United Arab Emirates
UK United Kingdom
URSDL Unclassified Rescheduled Loan
USA United States of America
USD US Dollar
VAT Value Added Tax
WAR Weighted Average Resilience
WB World Bank
WIR Weighted Insolvency Ratio
WTI West Texas Intermediate

Financial Stability Report 2020 xxv

 EXECUTIVE SUMMARY
This report reveals the assessment of Bangladesh Bank on the resilience of the financial
system of Bangladesh in withstanding risks and vulnerabilities, and the initiatives taken in
the calendar year 2020 (CY20). Also, the report elucidates the structural trends and issues
relating to developments and regulations of the financial sector which have bearing for the
stability of the financial system of Bangladesh.
Global economy experienced a negative growth in 2020 primarily due to COVID-19
pandemic. Affected by the pandemic, almost all economies around the world experienced
economic downturn attributable to disruptions in supply chain and suppressed global demand.
Major trading partners of Bangladesh, such as China, USA and Europe, hit hard by the COVID-19
which eventually elevated risk for Bangladesh through external sector. Global interest rates
were in downtrend throughout the year 2020. By the same token, the yield on all the major
international 10-year government bonds shifted downward. Also, crude oil price marked a
sharp decline in the first half of the year 2020 before demonstrating recovery in the second-half.
Noteworthy, still the pandemic driven uncertainty has not faded away from the global
economic horizon.
The domestic macroeconomic situation displayed reasonable level of resilience amidst the
havoc of the deadly pandemic. Real GDP marked a slower growth of 5.24 percent during the
fiscal year 2020 (FY20) primarily due to disruptions in domestic and external demand stemmed
from the pandemic in the second half of the year. Similarly, domestic credit from the banking
system also experienced the lower growth, partly due to subdued credit demand during the
earlier phase of COVID-19 in Bangladesh. Moreover, inflation increased to 5.69 percent at
end-December-2020, recording minor increase of 0.10 percentage point from that of the
previous year, mainly due to rise in food inflation. In the external front, both export and import
of the country observed notable decline attributable largely to the widespread disruptions in
global production and distribution networks along-with marked decline in consumer demands.
However, the foreign remittance inflow, despite the pandemic’s browbeat, experienced a
remarkable growth which eventually helped current account balance (CAB) to turnaround from
the deficit to surplus. Besides, robust foreign remittance inflow helped BDT to get stronger
against USD contrary to the indication of appreciated REER index. Gross foreign exchange
reserves, recording an astounding 32 percent growth, stood at USD 43.2 billion at
end-December 2020. Though it seems that the domestic economy has absorbed several
dimensions of the COVID-19 shockwaves relatively well, the subsequent waves of the same
across the globe might uncover some unidentified challenges for the domestic economy in the
near future.
The banking sector recorded a substantial asset growth showing its buoyancy during the
pandemic. The sector recorded a 13 percent asset growth in CY20 supported by a notable rise
in deposit growth (13.6 percent). Loans and advances, the main component of the assets,
experienced a moderate growth of 8.4 percent attributable to investment uncertainties amid
the ongoing pandemic. Private commercial banks (PCBs) held the major portion (68.9 percent)
of the earning assets of the banking industry which seems to be a good indication for the
sector’s stability since the performance of this banking group in asset management, in terms of
asset quality, is better than other bank groups. Compared to CY19, the concentration of assets
within the top five (5) and top ten (10) banks increased marginally in CY20. Sector-wise loan

Financial Stability Report 2020 xxvii

concentration risk also increased slightly during this year. Share of liquid assets of the PCBs in
the industry increased fairly whereas the shares of the state-owned commercial banks (SOCBs)
and foreign commercial banks (FCBs) declined moderately. In the liability side, current and
savings deposits of the banking sector marked a considerable growth while term deposits
experienced a sluggish growth compared to the previous year. Consequently, shares of term
deposit, current deposits and savings deposits in total banking sector's deposit stood at 48.2
percent, 21.6 percent and 20.9 percent respectively in the review year.
Asset quality of the banking sector demonstrated further improvement in CY20. Net NPL
ratio of the banking sector declined to -1.2 percent at end-December 2020 compared to 1.0
percent recorded at end-December 2019. Gross non-performing loan (NPL) ratio of the
banking sector declined to 8.1 percent at end-December 2020 from 9.3 percent at
end-December 2019, partially due to temporary relaxation in loan classification regulations in
the review year. Nevertheless, maintaining improved asset quality in post-COVID-19 situation
might remain a key challenge for the banking sector. However, the sector-wise NPL
distributions did not indicate a higher concentration of NPL in any particular sector except the
'Trade and Commerce' in CY20. All banks except 11 maintained adequate loan-loss provisions
as per the regulatory requirement of BB during the review year.
Capital to risk-weighted assets ratio (CRAR) of the banking sector remained stable in CY20.
At end-December 2020, CRAR of the banking industry was 11.6 percent against the regulatory
minimum requirement of 10 percent as advised in Basel III capital standard. Improved capital
positions of PCBs and FCBs were advantageous to keep the overall CRAR of the banking
industry stable in the review year. Banking industry maintained a Capital Conservation Buffer
(CCB) of 1.4 percent against the regulatory requirement of 2.5 percent in CY20. However, PCBs
and FCBs maintained both CRAR and CCB much above the regulatory requirement.
Additionally, the banking sector maintained a leverage ratio well above the regulatory
minimum requirement led mainly by the high leverage ratios of PCBs and FCBs.
Liquidity situation of the banking sector appeared to be easing in CY20. The banking sector
liquidity demonstrated an uptrend in CY20 compared to the preceding year. The aggregate
advance-to-deposit ratio (ADR) of the banking industry decreased to 72.7 percent at
end-December 2020 from 77.3 percent at end-December 2019 as the growth of deposits
(excluding interbank deposits) outpaced the growth of loans and advances during the review
year. Call money rate hovered within 4 percent to 5 percent till August 2020 and then stayed
below 3 percent till the end of the year. Nevertheless, the banking industry, as a whole, was
able to maintain the Basel III liquidity metrics-liquidity coverage ratio (LCR) and net stable
funding ratio (NSFR)-well above the regulatory requirement of 100 percent throughout the
year.
Except the profit, Islamic Shari’ah based banks performed better in CY20 compared to
CY19. Islamic banks experienced a steady growth in terms of assets, liabilities, deposits,
investments (loans and advances), and shareholders’ equity in CY20 compared to the previous
year. As of end-December 2020, more than one-fifth of the banking sector assets were held by
eight Islamic banks. Asset quality of the Islamic banks improved in the review year. CRAR of
these banks stood at 12.7 percent. Their net profit after tax declined from that of the previous
year but remained above the industry average. Besides, the Islamic banks maintained LCR and
NSFR higher than the respective regulatory requirements.
Banking sector’s overall risk exposures remained largely stable. In 2020, the overall risk of
the banking sector, measured by the Risk-weighted assets (RWA) density ratio, decreased.

xxviii Financial Stability Report 2020

Credit risk weighted assets showed an improvement with respect to total asset growth.
However, market risk, in spite of its small share in total banking sector risk, requires more
attention as market RWA posted sizeable increase in CY20 compared to the previous year.
Banking and FIs sectors appeared to be broadly resilient against different stress scenarios
during the review year. The stress test results indicate that the default of top large borrowers
would likely to have the highest impact on the banking sector’s resilience followed by the rise
in NPLs. The significant amount of loan concentration among a few borrowers and
considerable level of NPLs in some banks and FIs could pose noticeable risk to the overall
financial stability. Strict compliance of the guidelines on large loan and single borrower
exposure limit would be helpful in mitigating the risks on banks’ exposure.
The rising trend in NPL, lower loan loss provision, decline in equities and profitability
appear to pose some notable concerns for financial institutions (FIs) sector in CY20. During
the review year, total assets of FIs grew slightly which was mainly attributable to a rise in FIs’
borrowings. As a source of fund, share of borrowings increased considerably against a
significant decrease in shares of equity. Accordingly, FIs’ liabilities to assets ratio increased
while aggregate capital adequacy ratio (CAR), in line with Basel II capital standard, decreased.
Moreover, asset quality of FIs remained a key concern as classified loans and leases ratio
increased considerably in the review year, leading to a marked decline in profitability.
Despite the initial impact of COVID-19, the major capital market indicators (i.e., index
value, market capitalization and turnover) increased considerably in 2020 at the Dhaka
Stock Exchange (DSE)-the prime bourse in Bangladesh-compared to those of the preceding
year. Expansionary monetary policy, prudent management of pandemic, and BSEC’s apt
strategies helped the capital market to remain buoyant in the review year. The role of banking
sector remained crucial in the DSE having third highest market capitalization. Though
banking industry’s exposure to capital market increased slightly, still it remained much below
the allowable investment limit set by BB. As a result, it appears that under the current context
equity price shock would not pose any notable stability threat to the banking sector in the
near-term.
In December 2020, yield curves for both short-term Treasury bill and long-term Treasury
bond exhibited a noticeable downward trend compared to those of December 2019 and
June 2020. The downward trends in yield curve reflect lower cost of government’s borrowing.
Moreover, the higher decline in short-term yield than the long-term ones made the yield
curve steeper indicating a higher maturity risk premium. Primarily, bond market in
Bangladesh is dominated by government bond, activities of which are mostly based on
primary auctions.
In 2020, the money market was largely stable and experienced a liquidity glut since August
2020. Up to August 2020, the money market was largely stable by remaining watchful and
with the liquidity support from the central bank. Afterwards, from September to December
2020, the money market experienced a liquidity glut. During this time, call money rate,
interbank repo rate, and treasury yield dropped noticeably, which could largely be attributed
to expansionary monetary policy stance of the central bank and proactive management of
the liquidity situation.
The financial infrastructure in Bangladesh continued to evolve for ensuring an efficient
and safe payment and settlement system. During the review year, transactions through
various payment platforms including the digital ones have increased significantly, indicating
stakeholders’ growing dependency and confidence on the efficiency and safety measures of

Financial Stability Report 2020 xxix

the financial infrastructure. Besides, coverage of banks’ online branches also enhanced in
CY20. Expressly, SDBs had accelerated transformation from manual to online banking solution
in the review year, covering 78.33 percent online banking facilities compared to 30.89 percent
in CY19. During 2020, MFS experienced massive growth especially in person-to-person
payments, disbursement of salary (mostly to RMG workers), utility bill payments and
merchant payments. As automation in payment system may simultaneously pose cyber and
operational risks, BB always remains vigilant over these issues to ensure a secured payment
system. In CY20, the payment infrastructure appeared to have posed no systemic risk for the
financial system of Bangladesh. Although a few cases of domestic frauds and forgeries were
noticed, they could not exert any adverse effect on financial stability of the country.
The foreign exchange (FX) market was mostly stable during the review year. No abrupt
volatility was observed in the FX turnover while FX net open position remained well below
the approved limit of BB. In CY20, the interbank (local) FX turnover increased compared to
that of CY19. FX assets and liabilities of banks and FX contingent liabilities showed an
increasing trend in the review year. During the period, L/C opening decreased slightly while
L/C settlement decreased considerably which resulted in untrammeled FX market. Moreover,
record growth in wage earners’ remittances, low import payment and increased external debt
contributed to the buildup of a sizeable foreign exchange reserve. However, BB’s intervention
in the market through purchasing USD helped to manage the appreciation pressure on the
nominal exchange value of BDT against USD. Gross FX appeared to be adequate in terms of
import coverage and ability to withstand probable external shocks in the near future. Yet, real
effective exchange rate (REER) index experienced further appreciation during this year.
However, due to the limited exposure, banks’ FX risks remained low during the review period.
Insurance sector experienced a slowdown during the review year which could largely be
attributed to the COVID-19 pandemic. The insurance penetration ratio of the country
declined in 2020 compared to that of the preceding year. Likewise, insurance density ratio
also deteriorated which suggests that the large portion of the population remain outside the
insurance coverage. Moreover, gross premiums in both life insurance and non-life insurance
companies decreased as well. Importantly, asset size of the insurance sector increased during
the review year, though as a percentage of GDP it remained low as well. Also, concentration of
insurance business among the top companies warrants intensive supervision and monitoring
because of their systemic importance in the insurance sector. In brief, due to its limited
exposure to different financial sectors, adverse shocks in insurance sector may not appear to
be a big concern for the entire financial system's stability.
During FY20, the overall performance of MFIs in Bangladesh was reasonably stable.
Amidst the first wave of COVID-19 pandemic, microfinance sector continued growing and
posing no major threat to the stability of the financial system of Bangladesh due to its small
market share, low NPL ratio compared to banks, and COVID-19 related stimulus packages for
the MFIs. Besides, donation to equity ratio remained stable in FY20 albeit decline in ROA and
ROE during this period. All these helped the sector to remain sustainable. However, high
degree of market dominance by the top MFIs warrants close monitoring for the stability of
this sector.
Overall, in CY20, financial system of Bangladesh remained broadly resilient with reasonable
level of stability despite the impact of the pandemic. However, uncertain aftershocks of
COVID-19 pandemic might trigger some unanticipated challenges for the financial system of
Bangladesh in the near future.

xxx Financial Stability Report 2020

Chapter 1
MACROECONOMIC DEVELOPMENTS
After a considerable decline in CY19, the global economy experienced negative growth in CY20
largely due to COVID-19 pandemic. Indeed, the pandemic made a massive disruption in almost all
sectors of the world economy leading to a record shrinkage in global output. Most of the trading
partners of Bangladesh economy except China experienced negative growth in CY20, which
elevated external sector risk of the country. However, global interest rates were in downtrend
throughout CY20, owing mostly to considerable monetary easing offered by central banks and
monetary authorities to alleviate the adverse impact of the pandemic. In tandem with the
benchmark rate, the yields on all the major international 10-year government bonds shifted
downward. Besides, albeit sharp decline in the first half of the review year, crude oil price recovered
considerably in the second half. On the domestic front, GDP growth in FY20 recorded large decline
due to depressed domestic and external demand owing to precipitating COVID-19 infection.
Industry and service sectors accounted mostly for the unanticipated decline in GDP. Growth of
total domestic credit from banking system in CY20 declined markedly with private sector credit
growth slowing down further across its declining trend. The Credit-to-GDP Gap further narrowed
in FY20, turned into negative, signifying no apparent sign of stability threat. At end-December
2020, the annual average headline inflation rose slightly owing to increase in food inflation.
In CY20, both export and import of the country dropped markedly, mainly due to the adverse
shocks of COVID-19 pandemic in global supply and demand. However, inflow of foreign
remittance, despite browbeat of the pandemic, experienced a remarkable growth which
essentially helped the country’s CAB to turn around from the deficit to surplus. Though REER index
recorded minor appreciation suggesting the scope of domestic currency depreciation, in effect
BDT became stronger against USD, which might be an issue to be dealt with prudently to maintain
export competitiveness. Capital inflow through direct investment declined moderately in the
review year compared to that of the preceding year, attributable to adverse impact of the
pandemic across the globe. On the other hand, gross external debt experienced a 17.2 percent
growth in CY20 and the ratio of gross external debt to GDP reached 21.4 percent which still seems
to be less risky. However, private short-term foreign debt warrants a close vigilance as it might be
a trigger point of potential external sector vulnerability. Regarding the external sector
sustainability viewpoints, the import coverage elevated to 8 months in the review year against the
common benchmark of 3 months, as foreign exchange reserve of Bangladesh posted a
remarkable growth in CY20. Moreover, foreign exchange reserves are sufficient to meet around
400 percent of annual short-term debts.
This chapter also contains a financial stability map which depicts moderate level risk in a few
components in CY20. Compared to CY19, the stability situation slightly deteriorated in the external
economy and fiscal condition component while considerable deterioration took place in capital
and profitability component. On the other hand, slight improvements took place in domestic
economy, household, non-financial corporation while marked improvement was evident in
financial market condition and funding and liquidity component.

1.1 GLOBAL MACRO-FINANCIAL ENVIRONMENT

Global growth reached its lowest point in CY20 since 1961, mainly due to severe adverse
impact of COVID-19. Worldwide suppressed economic activities, especially in the US, Euro
area, India, and stressed condition in most of the emerging countries played a crucial role in
persistent slowing of global growth. COVID-19 pandemic, coupled with ongoing US-China
trade tension, considerably worsened the Global Value Chain (GVC) and weighed on the

Financial Stability Report 2020 1

production and trade in countries integrated with the Chain. In response to weak economic
condition, central banks and monetary authorities in different countries revised down their
policy rates significantly and adopted some unconventional monetary measures to support
the economic activities. For instance, US Federal Reserve significantly cut its policy rate to 0.25
percent from 0.75 percent as on 15 March 2020. 10-year sovereign treasury bond yields of US,
EU, UK, and China showed declining trends during the first half of CY20. However, they were
in uptrend during the second half of the year, giving a sign of positive market sentiment about
the growth outlook. Indeed, somewhat weakening trend of COVID-19 infection supported by
introduction of vaccine in the later part of the year showed some light of hope among the
people, which helped to recover the world economic growth in the second half of CY20.

1.1.1 GLOBAL MACROECONOMIC ENVIRONMENT

At the end of CY20, the world GDP (in current price) stood at USD 84.54 trillion. Noteworthy
that, advanced economies had a 60 percent share in world GDP, whereas emerging and
developing Asian countries had a 24 percent share, and the rest of the world had a 16 percent
share (Chart 1.1). Global output growth, which has been witnessing a downward trend since
2017, fell to the record lowest in CY20, within six decades, in the face of pandemic, but is
expected to be positive in CY21 (Chart 1.2). In CY20, widespread control measures in most of
the countries, especially in larger economies due to COVID-19, led to substantial fall in global
economic growth to -3.3 percent1. In particular, advanced economies, and economy of
Emerging and Developing Asia shrank by 4.7 percent and 1.0 percent respectively.

CHART 1.1: SHARE OF WORLD GDP IN 2020 CHART 1.2: WORLD GDP GROWTH
9.0 8.6
6.7 6.6 6.4
7.0 6.0 6.0
5.3
16% 4.4
Advanced 5.0 3.8 3.6
3.4
Economies 2.8 5.1
GDP Growth (in %)

3.0
3.6
Emerging and 2.5
1.0 2.2
Developing Asia 1.7 1.6 -1.0
24% 60%
-1.0 2016 2017 2018 2019 2020 2021p* 2022p*
Rest of the
-3.3
World -3.0

-5.0 World -4.7

Advanced Economies
-7.0 Emerging and Developing Asia

Note: Data as of December 2020. Note: p* - Projection.

Source: Data from World Economic Outlook, IMF, April 2021; FSD Staff Source: World Economic Outlook, April 2021.
Calculation.

Global growth has both supply-side and demand-side implications for Bangladesh. Data of
FY20 reveal that the top 5 (five) sources of imports for Bangladesh were China, India, USA,
Indonesia, and Japan. All of these countries except China experienced negative GDP growth
in 2020, but they are projected to grow positively in 2021 and 2022 given the slowdown of
pandemic (Chart 1.3). Economic recovery in major import originating countries as indicated
by the projection would reduce uncertainties over imports and their associated cost.

1
See IMF’s World Economic Outlook, April 2021.

2 Financial Stability Report 2020

 CHART 1.3: GDP GROWTH OF TOP IMPORT CHART 1.4: GDP GROWTH OF TOP EXPORT
ORIGINATING COUNTRIES DESTINATION COUNTRIES
15.0 8.0
6.0
10.0 4.0
GDP Growth (in %)

2.0

GDP Growth (in %)

5.0 0.0
2016 2017 2018 2019 2020 2021p* 2022p*
-2.0
0.0 -4.0
2016 2017 2018 2019 2020 2021p* 2022p*
-6.0
Germany
-5.0 -8.0 USA
China India UK
-10.0
USA Indonesia Spain
-10.0 Japan -12.0 France

Note: p *- Projection.
Source: World Economic Outlook, April 2021.

On the other hand, the top 5 (five) export destinations for Bangladesh in FY20 were USA,
Germany, UK, Spain, and France. All these countries experienced negative economic growth
in CY20 (Chart 1.4). Economic fallout caused by COVID-19 in these countries in first half of
CY20 was reflected in shrinking RMG export of Bangladesh. However, recovery in GDP growth
of these countries as projected for CY21 and CY22 by the IMF would help Bangladesh to
recoup her export growth.
Data of FY20 reveal that the top 5 (five) CHART 1.5: GDP GROWTH OF TOP 5 REMITTANCE
remittance sourcing countries for Bangladesh SOURCING COUNTRIES
8.0
were KSA, UAE, USA, Kuwait, and UK. All of
6.0
these countries experienced negative 4.0
economic growth in CY20. Normalization of
GDP Growth (in %)

2.0
economic growth in these economies in CY21 0.0
2016 2017 2018 2019 2020 2021p* 2022p*
and CY22, as per the IMF projection, could -2.0
-4.0
lower the downside risk to the Balance of
-6.0
Payments of Bangladesh (Chart 1.5). -8.0
KSA
UAE
-10.0 USA
1.1.2 GLOBAL FINANCIAL MARKET -12.0
Kuwait
UK

ENVIRONMENT Note: p*- Projection.

Source: World Economic Outlook, April 2021.
Vulnerabilities in the international financial
system remained elevated in CY20 mainly due to rising global debt from monetary and
financial stimulus packages implemented by respective authorities to support their
economies and to meet enhanced medical expenditure because of the pandemic. The
underlying global macro-financial conditions and geopolitical uncertainties posed
substantial spillover risks to the emerging economies.

1.1.2.1 DEVELOPMENT IN MAJOR FINANCIAL MARKETS

The CY20 started with a steep fall in major stock indices, which continued till early March
2020, posted to the year lowest position, attributable largely to uncertainties posed by
COVID-19. However, equity prices started to rebound from the late March 2020 and
demonstrated substantial recovery in late 2020. During the year, S&P 500, NASDAQ, Dow
Jones 30, and Japanese Nikkei 225 registered substantial increases of 15.1, 42.8, 6.1, and 19.2
percent respectively. However, Euro Stoxx 50, and Australian S&P/ASX 200 experienced little
decrease of 4.4 and 2.3 percent respectively (Chart 1.6).

Financial Stability Report 2020 3

Prompt recovery measures and sizable stimulus packages by different governments with
substantial monetary easing by the central banks, especially from US Fed sparked investor’s
expectations of a strong recovery, which led to optimistic valuation of equity market. The
magnitude of interest rate cut instigated the investors to inject more money into stock with a
persistent expectation of receiving higher returns. Furthermore, slow down of infection, high
recovery rate of COVID-19 patients and development of vaccine bolstered market sentiment
about strong recovery of global economy. In addition, tech giants continued to boom in the
CY20, which drove the stock market up in the last half of the year.
CHART 1.6: MOVEMENT OF MAJOR GLOBAL STOCK MARKET INDICES
180

160

140

120

100

80

60

S&P 500 NASDAQ Composite Dow Jones 30

Base date: 2019-07-01
Euro Stoxx 50 Nikkei 225 S&P/ ASX200

Source: Investing.com (https://www.investing.com/indices/major-indices).

1.1.2.2 YIELD OF GOVERNMENT BOND OF MAJOR ECONOMIES

CHART 1.7: YIELD OF 10-YEAR GOVERNMENT BONDS OF The yield of the major international
MAJOR ECONOMIES 10-year government bonds (USA, China,
3.5 UK and EU) displayed downward trends
3.0 during the first half of the CY20.
However, the same started to rise in the
Yield of the bonds (in %)

2.5

2.0
second half of the year (Chart 1.7). It is
noteworthy that, year-end yield rates of
1.5
these bonds were lower than the
1.0
opening yield rates of CY20, except the
0.5 Chinese government bond. Indeed,
0.0 falling benchmark interest rates drove
bond prices to rise. Importantly, with
falling interest rate, investors expecting
USA China UK EU
higher return tempted to invest in
non-investment grade corporate bond,
Source: European Central Bank; investing.com
increasing the debt of corporate sector
to a riskier level.

1.1.2.3 CRUDE OIL PRICES IN INTERNATIONAL MARKET

POL (petroleum, oil and lubricants) is a significant import commodity, whose price movement
considerably influences the import growth of the country. Oil price also acts as a significant
driver of domestic inflation since the production and transportation cost largely depends on
the oil price.

4 Financial Stability Report 2020

 CHART 1.8: CRUDE OIL PRICE (WTI)*
80

70

60
Price in USD/Barrel

50

40

30

20

10

2017-05-01

2020-07-01
2016-01-01
2016-03-01
2016-05-01
2016-07-01
2016-09-01
2016-11-01
2017-01-01
2017-03-01

2017-07-01
2017-09-01
2017-11-01
2018-01-01
2018-03-01
2018-05-01
2018-07-01
2018-09-01
2018-11-01
2019-01-01
2019-03-01
2019-05-01
2019-07-01
2019-09-01
2019-11-01
2020-01-01
2020-03-01
2020-05-01

2020-09-01
2020-11-01
2021-01-01
Source: Federal Reserve Economic Data.
*West Texas intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used
as a benchmark in oil pricing.

Chart 1.8 displays the global crude oil price movement in the last five years, which was
broadly stable except the first half of CY20. With the onset of COVID-19, the price sharply fell
by 71 percent in the first quarter of CY20. Oil price plummeted to USD 16.6 per barrel on the
first day of April 2020 from USD 57.5 per barrel on the first day of January 2020. However, it
started to recover from the second quarter and reached to USD 52 per barrel at the end of the
year. Depressed oil price, in effect, reduced the import and production cost of local producer,
which helped to absorb some inflationary pressure in the domestic economy of Bangladesh.
On the other hand, it may represent some future implications on remittance from
oil-dependent Gulf economies, though Bangladesh received steady flow of remittance during
the fall of oil price.

1.1.2.4: INTERNATIONAL INTEREST RATE ENVIRONMENT

Low global interest rates make the debt more sustainable and help contain the rise in
macroeconomic risks and market volatility.
As the domestic interest rate remains stable and the global interest rates are moving
downwards (as highlighted in Chart 1.9 and Table 1.1), the widened interest rate differentials
might draw capital from foreign investors searching for higher yield. Consequently, the
exchange rate and foreign exchange reserve might be impacted favorably in the near-term
due to exogenous interest rate shocks.

CHART 1.9: US FED FUNDS TARGET RANGE (UPPER LIMIT) TABLE 1.1: POLICY RATE CUTS IN COUNTRIES
3.00 Rate Previous Change
Country Direction
(Dec. 20) Rate Date
2.50
US 0.25% ↓ 1.25% 15-Mar-20
Policy Rate (in %)

2.00 China 3.85% ↓ 4.05% 20-Apr-20

1.50
Australia 0.10% ↓ 0.25% 04-Nov-20
1.00
S. Korea 0.50% ↓ 0.75% 28-May-20
0.50
India 4.00% ↓ 4.40% 22-May-20
0.00
Mexico 4.25% ↓ 4.50% 25-Sep-20

England 0.10% ↓ 0.25% 19-Mar-20

Source: Websites of respective central banks.

Source: Federal Reserve Economic Data.

Financial Stability Report 2020 5

1. 2 DOMESTIC MACROECONOMIC DEVELOPMENT
1.2.1 GDP GROWTH
Due to COVID-19 pandemic, the economy of Bangladesh experienced enormous disruptions in
almost all sectors, which led to unanticipated loss in GDP growth. With the introduction of
various control measures taken to contain the Coronavirus infection, production activities of
manufacturing industry and most segments of service sector experienced drastic fall. As a
result, GDP growth declined by 2.9 percentage points in FY20 from that of FY19, ending up with
5.24 percent growth. Agriculture, industry and service sector growth fell by 0.8, 6.2 and 1.5
percentage points respectively in FY20 from 3.9, 12.7 and 6.8 percent in FY19. Chart 1.10
exhibits that service and industry sectors remained the significant value adding sectors to the
economy in FY20. Quantitatively, agriculture, industry and service sector contributed 0.4, 2.3
and 2.7 percent respectively to the Gross Value Added (GVA) of Bangladesh in FY20.
Importantly, as Chart 1.11 reveals, real GDP growth of Bangladesh remained the highest among
its Asia-Pacific peers.
CHART 1.10: GROSS VALUE ADDED (GVA) OF BANGLADESH CHART 1.11: GDP GROWTH OF SELECTED ASIAN ECONOMIES
9 10.00
8 8.00

7 6.00
3.5
6 3.4 4.00
Growth in percent

3.3 3.6 2.00

In Percent

5 3.1
3.0 3.0 0.00
4 2.7
-2.00
3
3.9 4.3 -4.00
2 2.4 2.9 3.4 3.2
2.7 2.3 -6.00
1
-8.00
0.4 0.7 0.5 0.4 0.5 0.6 0.6 0.4
0 -10.00
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
-12.00
Agriculture Industry Service 2019 2020

Source: Bangladesh Bureau of Statistics. Source: World Economic Outlook, IMF; Economic Trends, BB.

1.2.2 DOMESTIC CREDIT FROM BANKING SYSTEM

In CY20, growth of domestic credit from the banking system declined considerably compared to the
growth trend of last four years. Private sector credit growth tapered off as credit demand remained
subdued during two-month long general holidays declared by the Government at the onset of
COVID-19 to contain its widespread adverse impact. Further, weak domestic demand as well as
uncertainties over new investment after the general holidays appeared to have impeded the
recovery of private credit growth. In CY20, private sector credit grew by only 8.4 percent (Chart 1.12).
CHART 1.12: DOMESTIC CREDIT FROM BANKING SYSTEM-COMPONENTS’ SHARE AND GROWTH
1400 10 60.0%
Ratio of Private to Public Sector Credit

1200 50.0%
8
Thousands Crore BDT

1000
40.0%
800 6
30.0%
600 4
Growth

400 20.0%
2
200 10.0%
0 0 0.0%
CY12

CY13

CY14

CY15

CY16

CY17

CY18

CY19

CY20

CY12

CY13

CY14

CY15

CY16

CY17

CY18

CY19

CY20

-10.0%
Public Sector Credit (LH)
-20.0%
PrivateSector Credit (LH)
Ratio of Private to Public Sector Credit (RH) Private Sector Growth Public Sector Growth
Note: 1 Crore= 10 Million.
Source: Monthly Economic Trend, BB.

6 Financial Stability Report 2020

However, public sector credit2 growth remained high in CY20; albeit lower than that in CY19.
Growth of public sector credit from the banking system was as high as 18.6 percent.
Government borrowings from the banking system remained high in the first half of CY20 to
finance the deficit attributable to reduced revenue collection and extended expenditure at
the onset of COVID-19. In the second half of CY20, high inflow of foreign loans, increased sale
of savings certificate and recovery in revenue collection eased the need of bank financing for
the Government. It is noteworthy that the ratio of private sector credit to public sector credit
came down to 5.1 in 2020 from 5.6 in 2019 (Chart 1.12).

1.2.3 CREDIT TO GDP GAP

The credit-to-GDP gap has been estimated using the Hodrick-Prescott filter approach
following the guidance of the Basel Committee on Banking Supervision (BCBS)3, which only
relies on the Credit-to-GDP Ratio itself and does not take into account other variables, those
may be relevant to the risks to financial stability. The estimated Credit-to-GDP Gap data
implies no significant excessive credit growth in the financial system of Bangladesh during
the period of FY1980-20194. In most of the estimation period, the Credit-to-GDP Gap
remained well below 5 percent except the period of FY2011 when it crossed the level of 5
percentage points. Furthermore, compared to FY18, the Credit-to-GDP Gap narrowed further
in FY19, became negative, signifying no apparent sign of stability threat to the financial
system stability evolving from domestic credit flow to the private sector (Chart 1.13).
CHART 1.13: CREDIT-TO-GDP RATIO-ITS TREND AND THE GAP

55.0
50.0
45.0
40.0
35.0
Percentage Points

30.0
25.0
20.0
15.0
10.0
5.0
0.0
2012
2013
2014
2015
1989
1990

2006
2007
2008
2009
2010
2011
1986
1987
1988

2000
2001
2002
2003
2004
2005
1980
1981
1982
1983
1984
1985

1991
1992
1993
1994
1995
1996
1997
1998
1999

2016
2017
2018
2019
-5.0

CREIDIT-TO-GDP RATIO TREND GAP

Source: Data from World Bank, FSD Staff Calculation.

1.2.4 INFLATION
The annual average CPI inflation (base: 2005-06=100) in Bangladesh stood at 5.69 percent at
end-CY20, increasing by 0.10 percentage point from 5.59 percent at end-CY19 (Chart 1.14),
mostly attributed to rise in food inflation.
During the period, the annual average food inflation rose to 5.77 percent at end-CY20 from 5.56
percent at end-CY19. Food price remained high largely in the second half of CY20 due to price
hikes of rice, pulses, vegetables and spices accompanied by price recovery of commodities in

2
Public sector credit consists of gross credit to government netting of government deposit held in the banking
system plus other public sector credit.
3
See Financial Stability Report 2018 of Bangladesh Bank for procedural details.
4
Data for FY20 was not available till the preparation of the section.

Financial Stability Report 2020 7

international market. Rise in rice price driven by flood and cyclone Amphan played the
dominant role in the rise of food inflation. However, annual average non-food inflation declined
to 5.56 percent at end-CY20 from 6.64 percent at end-CY19. Lower consumer demand on
clothing, footwear and household durables, due to pandemic-driven income shock and bearish
oil price in international market, mainly contributed to decrease in non-food inflation.
Considering last 12-months’ average, it is found that food inflation increased since June, 2020
while non-food inflation registered declining trend since May, 2020. The net effect on
headline inflation seems to be stable, demonstrating no apparent stability risk from an
inflationary point of view.

CHART 1.14: INFLATION AND ITS COMPONENTS CHART 1.15: 12-MONTH AVERAGE CPI INFLATION
8
7.0
7

CPI Inflation (in percent)

6 6.0
Rate of Inflation

5 5.0

4
4.0 Jan-19

Apr-19
May-19

Jan-20

Apr-20
May-20
Mar-19

Jul-19

Oct-19
Feb-19

Jun-19

Aug-19

Mar-20

Jul-20

Oct-20

Dec-20
Sep-19

Nov-19

Jun-20
Dec-19

Feb-20

Aug-20

Nov-20
Sep-20
3
General Food
Non-food
2 CY19 CY20
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
CY16 CY17 CY18 CY19 CY20
General Food Non-food

Source: Monthly Economic Trend, BB.

1.3 EXTERNAL SECTOR DEVELOPMENTS

1.3.1 EXPORTS AND IMPORTS
Both exports and imports were notably affected with the unprecedented global havoc of
COVID-19 pandemic attributable largely to widespread disruptions in global production and
distribution networks along with marked fall in consumer demands. Exports declined by
14.57 percent in CY20 and stood at USD 33.61 billion from USD 39.34 billion in CY19 (Chart
1.16). Imports, on the other hand, registered shrinkage of 16.79 percent in CY20 and dropped
to USD 45.78 billion from USD 55.02 billion in CY19.
CHART 1.16: EXPORT AND IMPORT TREND OF BANGLADESH
60 55.25 55.02
47.78 45.78
50
41.27
Amount in billiion USD

39.25 39.34
40 34.89 35.87
33.61
30

20

10

0
2016 2017 2018 2019 2020
Export Imort

Source: Monthly Economic Trends (various issues).

8 Financial Stability Report 2020

The export basket of Bangladesh predominantly comprises Readymade Garments (RMG),
particularly, knitwear and woven garments. About 85 percent of goods exported from
Bangladesh are RMG.
CHART 1.17: EXPORTS OF BANGLADESH CHART 1.18: REGION-WISE EXPORT GROWTH OF RMG
18000 50
16000 40
14000
30
12000
In Million USD

Percent Growth
10000 20

8000 10
6000
0
4000 CY17 CY18 CY19 CY20
-10
2000
0 -20
Knitwear Woven Others
-30
CY17 CY18 CY19 CY20 EU USA Other Countries

Source: Various issues of Bangladesh Bank Quarterly.

Chart 1.17 depicts that total export has declined by 14.6 percent in CY20, primarily driven by
slow growth of RMG export. In the RMG sector, exports of knitwear dripped by 13.5 percent
while that of woven waned by 20.4 percent. Widespread disruption in global trade and
commerce due to the COVID-19 pandemic affected both supply and demand-side factors of
RMG. At the onset of COVID-19, RMG exporters started trailing orders from the affected bloc,
which largely weighed down the steady growth of RMG exports experienced throughout the
last decade. However, exports of other goods, as a whole, recorded a positive 10.9 percent
growth in CY20. Chart 1.18 reveals the destination-wise distribution of RMG exports, which
exhibits that in CY20, RMG lost export earnings notably from all key regions. RMG export in
the EU, which captures the lion’s share of the total market, fell by 16.3 percent while it slid
down by 15.8 percent in the USA, the second-largest destination. In all other countries, it
plunged by 20.4 percent.
Imports of Bangladesh also slowed markedly in the review year of CY20. Chart 1.19 depicts
total imports from the top six import partners in the last five years. The main source-countries
of import for Bangladesh are China, India, Singapore, Indonesia, Japan, and the USA. Imports
from China, the largest import partner of Bangladesh, declined by 15.8 percent in FY20 while
that from India, the second-largest source of imports, decreased by 24.2 percent. The fall in
import growth from Singapore in FY20 is most notable, which witnessed about 45 percent
decline. However, imports from the USA increased by almost 20 percent, though it was one of
the most COVID-19 affected economies. Commodity-wise import scenario (Chart 1.20) reveals
that imports of capital goods and intermediate goods were largely disrupted in CY20. Imports
of capital goods, which enhance productive capacity of the economy, declined by almost 29
percent. This signals the extent of uncertainties faced by the entrepreneurs. In the review year,
the imports of intermediate goods declined by 8.5 percent, which seems to be consistent with
subdued economic activities in the country. On the other hand, the imports of food grains
and consumer goods increased by 28.8 percent and 12.4 percent respectively.

Financial Stability Report 2020 9

 CHART 1.19: IMPORTS OF BANGLADESH FROM CHART 1.20: COMMODITY-WISE IMPORTS OF
MAJOR PARTNERS BANGLADESH
16000 35000

14000 30000

12000 25000

In Million USD
In Million USD

10000 20000

8000 15000

6000 10000

4000 5000

2000 0
Food grains Consumer Intermediate Capital goods Others
goods goods
0
China India Singapore indonesia Japan USA

FY16 FY17 FY18 FY19 FY20 CY16 CY17 CY18 CY19 CY20

Source: Economic Data of BB Website; Various issues of Bangladesh Bank Quarterly.

1.3.2 REMITTANCE
Remittance plays a major role in the external sector's balance of Bangladesh. It largely
contributed to the build-up of the foreign exchange reserves of the country over the years,
thereby contributing towards the capital formation in foreign currency and stabilization of
the exchange rate. Remittance inflows got momentum since 2017 and interestingly, despite
economic fallout in major remittance source countries during the first half of CY20, it
increased by 18.67 percent in CY20 to reach USD 21.74 billion from USD 18.32 billion in CY19
(Chart 1.21).
CHART 1.21: REMITTANCE INFLOWS
25.0
21.74

20.0 18.32
Amount in billion USD

15.54
15.0 13.61 13.50

10.0

5.0

0.0
2016 2017 2018 2019 2020

Source: Statistics Department, Bangladesh Bank.

Gulf Cooperation Council (GCC) countries historically account for the lion’s share of remittance
inflows in Bangladesh. The USA alone is the second most important source of remittance
followed by the EU and the Asia Pacific countries. In CY20, the remittance growth from GCC
countries slowed down marginally while inflows from the EU countries experienced a sharp
decline (Chart 1.22). However, a relatively heavier flow of remittance from the USA and Asia
Pacific region contributed to offsetting the slowdown of remittance from other regions. In
CY20, remittance from the USA and Asia Pacific region has markedly increased by 41.8 percent
and 34.7 percent respectively. Thanks to the remittance-related incentives offered by the
Government, which can be seen not only as safeguards but also the driving force for inward
remittance growth throughout the pandemic.

10 Financial Stability Report 2020

 CHART 1.22: BLOC-WISE REMITTANCE GROWTH CHART 1.23: REMITTANCE FROM MAJOR COUNTRIES
50 2000
1800
40
1600
30 1400

Million USD
1200
Percent Growth

20
1000

10 800
600
0 400

Asia Pacific
GCC

USA

Other
EU

200
-10
0

15Q1

15Q3

16Q1

16Q3

17Q1

17Q3

18Q1

18Q3

19Q1

19Q3

20Q1

20Q3
-20

-30 Saudi Arabia U.A.E.

Kuwait U.S.A.
CY17 CY18 CY19 CY20
Other Major Countries
Source: Various publications of Bangladesh Bank.

In quarterly breakdown, it is observed that remittance started growing substantially after

June 2020 with the easing of COVID-19 infection in the source countries. Country-specific
inward remittance from major sources (Chart 1.23) reveals that remittance in the third quarter
of 2020 (July-September 2020) spiked with the gradual normalization of most economies.
Remittance from the KSA, the largest country as a remittance source, had 41 percent
quarter-to-quarter growth in this quarter, despite significant oil price drop and its bleak
tourism sector. Remittance from the USA, however, showed persistent growth from the
beginning of 2020. Also, remittances from UK, Qatar, Oman and Malaysia representing other
major countries seem to be the steepest in the third quarter of 2020.
1.3.3 CURRENT ACCOUNT BALANCE (CAB)
Export, import, and remittance are the three main components of the CAB. CAB has remained
in negative territory since CY17 given the predominance of imports in the net balance. CAB
became positive in CY20, recording an amount of USD 1.08 billion equivalent to 0.33 percent of
GDP (Chart 1.24). In the review year, both export and import faced a negative growth owing to
the COVID-19 pandemic. Contrary to general concern, remittance grew remarkably in CY20 and
gained higher growth than the previous calendar year, which contributed largely to CAB to be
surplus even in the pandemic situation (Chart 1.25). However, a sizeable fall in the import of
capital goods as pointed out in Section 1.3.1, and weaknesses prevailing in the global economy
have the potential to crystallize some pockets of risks to the external sector of Bangladesh.
CHART 1.24: TRENDS OF CURRENT CHART 1.25: CURRENT ACCOUNT BALANCE-TO-GDP
ACCOUNT BALANCE RATIO OF BANGLADESH
2.0 25.0
0.92 1.08
1.0 20.0
Percent Growth & CAB/GDP (in %)

0.0 15.0
2016 2017 2018 2019 2020
Amount in billion USD

-1.0 10.0
-2.0 5.0
-3.0 0.0
-2.93
CY17 CY18 CY19 CY20
-4.0 -5.0
-5.0
-10.0
-6.0
-5.86 -15.0
-7.0
-20.0
-7.05
-8.0 Export Growth Import Growth Remittance Growth CAB/GDP

Note: In calculation of CAB/GDP, GDP of corresponding fiscal year is taken into account.
Source: Various publications and Economic Data of BB.

Financial Stability Report 2020 11

1.3.4 EXCHANGE RATE MOVEMENT
Chart 1.26 exhibits that REER index experienced further appreciation in CY20, indicating
scope for depreciation of the domestic currency. Nominal exchange rate of BDT against USD
also experienced slight appreciation during the review year. As a result of this, export
competitiveness of the country might be lessening, particularly when most of the competing
countries got their currency depreciating during the review year (see Chart 1.27). Import, on
the other hand, might be comfortable due to stronger local currency. However, as Bangladesh
imports approximately 25 percent of its import from China, appreciation of Chinese Yuan
against USD might not be encouraging for Bangladesh economy.

CHART 1.26: EXCHANGE RATE INDICES CHART 1.27: APP(+)/DEP(-) OF CURRENCY AGAINST USD IN 2020
120 120 8.0% 6.9%
115 115
6.0%
110 110
105 105 4.0%
1.9%
100 100 BDT/USD 2.0%
95 95 0.1%
Index

0.0%
90 90
85 85 -0.3%
-2.0% -1.2%
80 80 -2.4% -2.5%
-4.0%
75 75 -3.5%
70 70 -6.0%

REER Index BDT/USD

Source: BB Website.

1.3.5 CAPITAL FLOW MOVEMENT

Foreign direct investment, foreign portfolio investment, foreign grants, and external debt are
the main components of capital flow. Net FDI inflow in Bangladesh during FY20 was
somewhat depressing, mainly attributable to ongoing COVID-19 pandemic across the globe.
Chart 1.28 reveals that net FDI inflow dropped significantly in FY20. To turnaround this
situation, interest rate, exchange rate, and other policies on foreign investment might be
reevaluated.
Chart 1.29 shows that USA has the highest FDI stock in Bangladesh since 2015 followed by UK
and South Korea. However, the shares of Netherland and Singapore in country’s FDI stock
have been increasing noticeably in recent years.
CHART 1.28: NET FDI INFLOW CHART 1.29: MAJOR COUNTRY-WISE FDI STOCK
4.5 4.50
3.9 4.00
4.0
FDI Stock (In Billion USD)

3.50
3.5
FDI Inflow (in Billion USD)

3.00
3.0 2.50
2.5 2.6 2.4
2.5 2.00
2.0 1.50
2.0 1.7 1.8
1.5 1.00
1.5 1.2 0.50
0.9 0.00
1.0 0.8

0.5

0.0

FY-15 FY-16 FY-17 FY-18 FY-19 FY-20

Source: FDI survey reports, Bangladesh Bank.

12 Financial Stability Report 2020

1.3.6 EXTERNAL SECTOR DEBT
1.3.6.1 MAGNITUDE OF EXTERNAL DEBT
Though external debt is important for domestic growth of emerging economies like
Bangladesh, excessive foreign debt might be burdensome to meet the growing debt
servicing requirement and risky from the macro-financial stability perspective.
Chart 1.30 shows the increasing trend in external debt since 2016. Gross external debt of
Bangladesh has reached to USD 70.7 billion in CY20, experienced 17.2 percent growth from
the previous year. However, nearly 84.5 percent of total external debt (i.e., USD 59.7 billion) is
long-term in nature, which is relatively less risky compared to short-term external debt. On
the other hand, short-term external debt, amounting USD 11.0 billion in CY20, is about 15.5
percent of total external debt.
Furthermore, Chart 1.31 shows the external debt to GDP ratio of Bangladesh in CY20 was 21.4
percent, which seems to be low both in comparison with other SAARC countries and in terms
of the international standard.
CHART 1.30: GROSS, SHORT AND LONG-TERM CHART 1.31: EXTERNAL DEBT TO GDP RATIO
EXTERNAL DEBT IN NEIGHBORING COUNTRIES (CY20)
70.0%
80.0 70.7
60.9%
70.0
60.3 59.7 60.0%
60.0 55.5
50.3 50.6
46.5
in Billion USD

50.0 41.3 50.0%

39.6 43.8%
40.0 33.4
40.0%
30.0
20.0 10.8 11.0
7.8 9.0 9.7 30.0%
10.0 21.4% 21.4%
0.0 20.0%
2016-Q4 2017-Q4 2018-Q4 2019-Q4 2020-Q4
10.0%
Total External Debt
Short-term External Debt
0.0%
Long-term External Debt
Bangladesh India Pakistan Sri Lanka
Source: BB Website (Economic Data). Source: BB Website and other websites.

1.3.6.2 NATURE OF EXTERNAL DEBT

Chart 1.32 reveals that the share of CHART 1.32: SECTOR-WISE EXTERNAL DEBT OF BANGLADESH
public sector external debt was 79.1
60.0 55.9
percent (i.e., USD 55.9 billion) in CY20.
47.2
This seems relatively less risky since 50.0
38.0
43.0
In Billion USD

large portion of the public external 40.0 32.0

debt is usually concessional loan 30.0
rather than commercial one. 20.0
9.3
12.3 12.5 13.1 14.8
10.0
0.0
2016-Q4 2017-Q4 2018-Q4 2019-Q4 2020-Q4

Public Sector External Debt Private Sector External Debt

Source: Bangladesh Bank Website (Economic Data).

Financial Stability Report 2020 13

Moreover, it is a matter of comfort that about 97 percent of those public external debts are
long-term in nature (Table 1.2), which are generally assumed as lesser risky than short-term
external debt. On the other hand, private sector external debt, which comprised of 21
percent of total external debt (USD 14.8 billion), are largely short-term in nature and usually
commercial loans which are considered to carry tangible risk. Currently, nearly 62.0 percent
(USD 9.1 billion) of total private sector external debts are short-term in nature. This might
warrant an extra caution as the rapid growth of short-term foreign debt is an early sign of
potential external sector vulnerability.
TABLE 1.2: SHARE OF PUBLIC AND PRIVATE SECTORS, EXTERNAL DEBTS-BY SHORT-TERM AND LONG-TERM
Year 2016-Q4 2017-Q4 2018-Q4 2019-Q4 2020-Q4
Public Sector External Debt 100.0% 100.0% 100.0% 100.0% 100.0%
Short-term 5.2% 4.9% 4.1% 3.2% 3.3%
Long-term 94.8% 95.1% 95.9% 96.8% 96.7%
Public Sector External Debt 100.0% 100.0% 100.0% 100.0% 100.0%
Short-term 66.6% 72.4% 58.2% 62.6% 61.9%
Long-term 33.4% 27.6% 41.8% 37.4% 38.1%
Source: Bangladesh Bank Website (Economic Data).

1.3.7 DEBT SUSTAINABILITY AND EXTERNAL SECTOR'S STABILITY

While there is no commonly accepted framework for specifying the threshold levels for debt
sustainability (in terms of foreign exchange liquidity) and stability indicators for external sector,
several metrics and measures are widely used for such estimation.
Foreign exchange reserve is a crucial component of an economy to provide resilience against
any unforeseen external shocks or emergencies. Therefore, it largely supports the debt
sustainability and external sector's stability. Primarily, the foreign exchange reserve helps to
meet up the growing import demands including capital goods. It provides confidence in
meeting external obligations (i.e., short- and medium-term foreign debts), especially in adverse
situations.
Table 1.3 highlights some key debt sustainability and external sector's stability indicators. It
shows that trade balance remains around the range of 5 percent of GDP, which does not imply
any near-term threat for the financial stability. CAB also improved in CY20 and remained 0.33
percent of GDP. Export to import ratio slightly increased in CY20 referring an improved (i.e.,
favorable) trade balance position. Another important external sector stability indicator is the
number of months of imports, which a country can maintain with its existing level of FX reserve.
Three months of import coverage is used as a benchmark. As the foreign exchange reserve of
Bangladesh marked record growth in CY20, the import coverage elevated to 8 months in the
review year from 5.5 months in the preceding year. Reserve remained 11 percent of GDP in FY20,
which seems to be adequate for a faster growing economy like Bangladesh.
The Greenspan-Guidotti rule states that a 100 percent cover of Short-term external debt over a
period of 12 months would indicate the adequacy of foreign reserve for Emerging Market (EM)
economies. Table 1.3 shows that in CY20, the reserve was sufficient to meet around 400 percent
of annual short-term debts. Total external debts still remained below 20 percent of GDP, which is
considered as a comfortable state. Among the debts, short-term obligations declined to around
16 percent in CY20. Elasticity of short-term debt to GDP remained negative in FY20, which also
refers to a safer indication. Share of public sector external debt to GDP stood at 16 percent in

14 Financial Stability Report 2020

CY20, slightly improved from CY19. FDI to external debt, however, decreased marginally from 29
percent in CY19 to 27 percent in CY20.
Overall, the external sector seems to have indication of a sustainable and stable outlook for
Bangladesh.
TABLE 1.3: DEBT SUSTAINABILITY AND STABILITY INDICATORS FOR EXTERNAL SECTOR
2016 2017 2018 2019 2020
Trade balance/GDP -2.4% -3.3% -6.7% -5.1% -5.3%
CAB/GDP 1.6% -0.8% -3.5% -1.3% -1.2%
Export/Import 0.85 0.75 0.71 0.71 0.73
Reserve in months of 9.1 6 5.2 5.5 8. 0
prospective imports
Reserve/Broad money 0.26 0.26 0.23 0.21 0.25
Reserve/GDP 0.14 0.14 0.12 0.11 0.11
Reserve/ST external debt 4.10 3.09 3.55 3.36 3.91
External Debt/GDP 0.18 0.18 0.20 0.20 0.20
ST external Debt/Total 0.19 0.21 0.16 0.16 0.16
external debt
FDI/Total external debt 0.35 0.29 0.31 0.29 0.27
Public sector external 0.14 0.14 0.15 0.15 0.16
debt/GDP
Growth of ST external 2.69 3.67 -0.68 -1.17
debt/Growth of GDP
Note: For the ratio with GDP, fiscal year (end-June) based data are used for both variables.
Source: NSDP, Statistics Department, BB quarterly; FSD Staff Calculation.

1.4 MAPPING FINANCIAL STABILITY

As financial stability could be affected through various channels, mapping the state of the
components of financial stability has the utmost importance, particularly in the context of
Bangladesh. This is also crucial because each financial crisis has affected financial system
stability in its unique way and a comprehensive framework is therefore needed to cover all the
possible stability threats. In the stated context, this section presents current stability map with
an aim to analyze possible stability threats for Bangladesh macro-financial system taking into
account 8 (eight) broad components5: external economy, domestic economy, households,
5
i) External economy component consists of 7 sub-indicators: real GDP growth of major trading partners, average
inflation of top 5 countries from which Bangladesh imports, average unemployment rate in countries from which
Bangladesh receives highest inward wage earners’ remittances, international crude-oil price, 3-months LIBOR rate,
current account deficit to GDP ratio, and reserve adequacy in months; (ii) Domestic economy component uses 4
sub-indicators, namely output gap, external debt to GDP, currency fluctuations, and consumer price index; (iii)
Household component consists of 3 sub-indicators, namely, household debt to GDP, credit portfolio quality in
household sector, and inward remittance to GDP ratio.; (iv) Non-financial corporation component covers 4 sub-in-
dicators: NFC credit to GDP, NFC loans as proportion of banking sector loans, indebtedness of large NFCs, and
credit portfolio quality of large NFCs; (v) Fiscal condition component uses 4 sub-indicators: Public debt to GDP,
government budget deficit to GDP, sovereign risk premium, and tax revenue to GDP; (vi) Financial market consists
of banking sector, financial institutions, and capital market. Eight (08) different sub-indicators have been used to
assess this component: asset concentration of D-SIBs, Gross NPL ratio in banks, RWA density ratio, banking sector
resilience map score, deposit covered by DITF, asset quality of FIs, P/E ratio in DSE, and DSEX value; (vii) Capital and
profitability component uses 4 indicators: CRAR, Tier I capital to RWA, NIM and ROA; and (viii) Funding and liquidity
component uses 3 sub-indicators: ADR, LCR, and NSFR.

Financial Stability Report 2020 15

non-financial corporations, fiscal condition, financial market condition, capital and
profitability, and funding and liquidity (Chart 1.33).
CHART 1.33: FINANCIAL STABILITY MAP (2019 AND 2020)
External Economy
1.0
0.9
0.8
Funding & Liquidity 0.7 Domestic Economy
0.6
0.5
0.4
0.3
0.2
0.1
Capital & Profitability 0.0 Households

Financial Market Non-Financial

Condition Corporations

Fiscal Condition
2019 2020
Source: Various publications of BB, IMF and WB; Compilation: FSD, BB.

Chart 1.33 depicts the comparative financial stability condition of Bangladesh’s macro-financial
system in CY19 and CY20 through a stability map. The map has been developed by following the
global best practices taking into account the unique nature of Bangladesh’s financial system6.
The stability map depicts moderate level risk in a few components. Compared to 2019, the
stability situation slightly deteriorated in the external economy and fiscal condition components
while considerable deterioration took place in capital and profitability components. On the
other hand, minor improvements took place in domestic economy, household, non-financial
corporation and marked improvement was evident in financial market conditions, and funding
and liquidity components. Though contraction of current account deficit, fall in oil price and
strengthening of reserve position took place, massive output loss in major trading partners and
rise in unemployment in top remittance-source countries caused the deterioration in external
economy. In contrast, slight improvement in domestic economy was observed partly due to
narrowing of output gap. Lower-level debt accompanied by improved credit quality and
sustained debt servicing capacity backed by higher remittance seem to be prime reasons behind
the improvement of household sector. NFC component, though improved slightly, remained
one of the riskier factors for financial stability because of high concentration of bank exposure to
large NFCs and high leverage of NFCs. Subdued revenue collection and increased healthcare,
safety net expenditures after the onset of COVID-19 prompted the Government to borrow more
to meet the fiscal deficit, causing minor worsening in fiscal condition. Financial market front
came up with much improved position with sizeable fall in gross NPL in the banking sector
bolstered by temporary relaxation in loan classification policy. However, prolonged stressed
condition of borrowers may backlash the banking sector if prudent measures are not taken.
Capital and profitability component exhibits a worsening scenario with bleaker profitability in
CY20 and deterioration of Tier-1 capital base. In contrast, funding and liquidity component was
found to be robust owing to central bank monetary easing.
6
It contains 8 components and 37 indicators. Standardized scores for the indicators have been calculated using a
formula: [Standardized Score = (xi-min)/(max-min)] where maximum and minimum values are incorporated using
time series data, and in some cases, by assigning appropriate threshold values. Threshold values are selected using
judgment, economic logic and experience of other countries. The component scores are calculated using
weighted average of the indicators and component scores are plotted in the map (in a scale of 0 to 1). The
components closer to the origin have values close to zero and indicate lower risk while components further from
the origin indicate higher risk and have value closer to one.

16 Financial Stability Report 2020

The detailed component-wise analysis is explained below while the scores are summarized in
Appendix XLIX.
External economy component: Unprecedented fall in real GDP growth of major trading
partners coupled with significant rise in unemployment in top remittance-source countries
increased the risk in external sector in CY20, despite high inward remittance and slow growth
of import that favored the external balance straightforward. Substantial drop in oil price in the
wake of COVID-19 pandemic weakened the oil-exporting economies, which was reflected in
loss of employment in those countries. If oil price remained low in the long-run, it may raise
stability concern for Bangladesh as it might shrink remittance inflow from the oil-exporting
countries through exerting unemployment and income shocks. On the positive side,
improvement in inflationary condition of import partners and reserve adequacy in terms of
import coverage in CY20 might help improve the external sector resilience.
Domestic economy component: Though external debt, headline inflation and volatility in
exchange rate rose in CY20 compared to CY19, domestic economy component remained
largely stable from the financial stability point of view partly due to narrowing output gap.
The COVID-19 pandemic yielded some imbalances in the domestic economy through
distorting the demand-supply dynamics. Slowdown of the economy appears to be a concern
if the economy struggled with self-correction in the face of ongoing pandemic.
Household Component: Lower household debt to GDP, better credit portfolio quality in the
household sector, and higher remittance to GDP ratio on the back of policy support give the
impression that this component remained less risky for the financial system of Bangladesh.
Higher remittance inflow helped households to maintain their credit worthiness. However,
rising unemployment in remittance-generating countries amid continuing COVID-19 and
muted oil price may transmit risks to household sector.
Non-financial corporation component: The risk to the financial system from this
component remained elevated due to high proportion of bank loans held by top NFCs7 and a
high debt-equity ratio of large NFCs.
Fiscal condition component: Rise in public debt, budget deficit and fall in tax collection in
CY20 resulted in modest deterioration of this component. Increased expenditure and lower
revenue collection on account of COVID-19 prompted the Government to increase its reliance
on borrowing through treasury securities and national savings certificate. Episodes of COVID-19
infection appear to be a major concern as it may still create stress on budget balance.
Financial market component: Much of the improvement in financial market component in
CY20 was largely due to marked fall in banks’ gross NPL ratio. Further, reduction in
risk-weighted asset density ratio and improvement in insurance coverage of deposits
supported such improvement. On the backdrop of economic fallout fueled by COVID-19, BB
continued relaxed loan classification policy until the end of CY20, which contributed to loan
remaining regular. But there remains a pocket of risks that NPL may rise again if the borrowers
get trapped in the financial burden for an extended period of time. Increase in asset
concentration of D-SIBs, deterioration in asset quality of FIs, decrease in banking sector
resilience under stress scenario and drop in equity prices in stock market were some gloomier
developments in the financial market of Bangladesh, which have potential to affect financial
system stability negatively.
7
In this study, Non-financial Corporation (NFC) mainly refers to large systemic borrowers who are engaged in
non-financial business. FSD used discretion in determining the NFCs and the definition may differ from the official
group definition used by BB.

Financial Stability Report 2020 17

Capital and profitability component: Despite improvement in overall capital base, weak
profitability of the banking sector and deteriorated Tier-1 capital undermined this
component from stability perspective. Moreover, capital gap to meet conservation buffer
requirement remains as a concern for banking sector.
Funding and liquidity component: Banking sector vulnerabilities under COVID-19 stress
seems to have been alleviated through notable improvement in liquidity condition.
Advance-to-deposit ratio (ADR) and Liquidity Coverage Ratio (LCR) improved markedly with
the support from BB cutting different policy rates and CRR in CY20. However, Net Stable
Funding Ratio (NSFR) of the banking sector declined because available fund made up of
longer-term liabilities, especially, growth of customers’ fixed deposit slowed down in CY20.
In a nutshell, financial stability map highlights that macro-financial condition of Bangladesh
was exposed to moderate level of risk in CY20. Prudent strategic move to create new overseas
job for migrant workers, favorable tax policies for the affected sectors of the economy, better
fiscal management in tandem with ongoing economic state, timely monetary and credit
support from BB aiming to boost economic recovery in financial sector along with strong
supervision to minimize misuse of fund are the some important factors that may contribute
to safeguarding financial stability in the current scenario.

18 Financial Stability Report 2020

Chapter 2
BANKING SECTOR’S PERFORMANCE
The banking sector of Bangladesh appeared to remain cautious, yet resilient in CY20. The sector
registered modest growth in assets compared to the preceding year, supported by a notable
growth in deposit. Indeed, Bangladesh Bank’s prudent policy measures and multiple refinance
schemes for different economic sectors in the wake of COVID-19, notable inflows of foreign
remittance, reduction in charges and fees on deposit products are some of the key drivers behind
the marked deposit growth during this year. Asset quality of the sector recorded substantial
improvement as both net as well as gross non-performing loan ratio notably declined compared
to that of the preceding year. Nevertheless, proper end-use of the loan disbursed during this year
under stimulus packages, close monitoring of the rescheduled loans and apt risk management
would be the keys to sustain the asset quality in the coming years.
During the review year, provision maintenance ratio of the banking sector increased considerably
compared to the preceding year, largely due to surplus provision maintained by the PCBs and
FCBs. Capital to risk-weighted assets ratio (CRAR) of the industry remained well above the
minimum regulatory requirement in line with Pillar I of Basel III capital framework, though the
ratio demonstrate no noticeable change from the preceding year. Importantly, the banking sector
maintained Basel III leverage ratio reasonably higher than the minimum regulatory requirement
during the review year.
The banking sector witnessed an easing liquidity situation during CY20 as both
advance-to-deposit ratio (ADR) and call money borrowing rate exhibited mostly a declining trend
during the second half of the year. Also, the sector remained compliant in terms of Basel III liquidity
metrics-Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). Besides, both the
conventional and Islamic Shari’ah based banks were able to maintain the minimum requirement
of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as of end-December 2020.
However, key profitability indicators of the industry, ROA and ROE, decreased compared to those of
the preceding year.
2.1 FINANCIAL SYSTEM OF BANGLADESH
The financial system of Bangladesh is broadly categorized into three different sectors
based on the degree of regulation and organizational settings. These are the formal sector,
semi-formal sector, and informal sector. The formal sector includes all institutions
operating under structured regulatory frameworks, e.g., banks, financial institutions (FIs),
insurance companies, capital market intermediaries, such as brokerage houses, merchant
banks, etc., and microfinance institutions (MFIs). The semi-formal sector comprises of few
specialized financial institutions which do not fall under the jurisdiction of financial sector
regulators, rather they are regulated by their own Acts or legal framework under different
ministries of the Government, e.g. Bangladesh House Building Finance Corporation
(BHBFC), Bangladesh Samabaya Bank Limited (BSBL), Investment Corporation of
Bangladesh (ICB), Palli Karma Sahayak Foundation (PKSF), Grameen Bank,
Non-governmental Organizations (NGOs), different cooperatives & credit unions and
discrete government programs. The informal sector refers to mainly the private
intermediaries that are mostly unregulated.
Bangladesh Bank (BB), being the regulatory authority of the money market and foreign
exchange market of the country, regulates and monitors the activities of all scheduled banks

Financial Stability Report 2020 19

and financial institutions (FIs). Currently, there are 6 state-owned commercial banks (SOCBs),
3 specialized development banks (SDBs), 43 domestic private commercial banks (PCBs and
Islamic banks)8, 9 foreign commercial banks (FCBs), 5 non-scheduled banks, and 34 financial
institutions (FIs) operating in Bangladesh. Bangladesh Securities and Exchange Commission
(BSEC) regulates and supervises the capital market comprising of two stock exchanges -
Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). The major capital market
intermediaries are merchant banks, stockbrokers, dealers, security custodians, credit rating
agencies, and asset management companies. At present, 63 merchant banks, 497 depository
participants (stock dealers, brokers, and security custodians), 48 asset management
companies are operating in the capital market of Bangladesh. Insurance companies and
micro-finance institutions are supervised by the Insurance Development and Regulatory
Authority (IDRA) and the Microcredit Regulatory Authority (MRA) respectively. At present, 79
insurance companies and 746 registered micro-finance institutions are functioning in
Bangladesh. Cooperatives and credit unions are regulated by the Registrar of Cooperatives.
Besides, the Ministry of Finance regulates Bangladesh House Building Finance Corporation
(BHBFC) and Investment Corporation of Bangladesh (ICB). Table 2.1 demonstrates the
financial system structure of Bangladesh.

TABLE 2.1: FINANCIAL SYSTEM STRUCTURE OF BANGLADESH

Financial Market/Infrastructure Institutions Numbers Regulator
SOCBs (6)
PCBs (43)
Money Market Banks
FCBs (9)
SBs (3)
Foreign Exchange
Bangladesh
Market Government-owned (3)
FIs Bank
Others (31)
Payment and
ADs, Money changers,
Settlement Systems
Formal Sector Others MFS providers, PSOs,
Financial System

PSPs, OPGSPs etc.

Merchant Banks (63)
DSE Credit Rating Companies
Capital Market CSE (8) BSEC
CDBL AMCs (48)
DPs (497)
Life Govt. Owned (2)
Insurance Market IDRA
Non-Life Others (77)
Micro Credit Market MFIs MFI (746) MRA

Semi-formal BHBFC, PKSF, ICB, Samabay Bank & Grameen Bank, cooperatives and credit
unions, Government Pension Scheme, Central Provident Fund, Private sector
Sector
pension/gratuity funds, and discrete government programs, etc.

Informal Sector

8
Very recently, 3 new banks have been awarded license to operate banking business in Bangladesh.

20 Financial Stability Report 2020

2.2 ASSET STRUCTURE OF THE BANKING SECTOR
After a declining trend till CY18, banking sector experienced a modest growth of asset in CY19
and CY20 (11.8 percent and 13.0 percent respectively), primarily supported by acceleration in
deposit growth rate.
The banking sector assets reached BDT 18,406.0 billion in CY20, registering a moderate
growth of 13.0 percent from that of CY19 (Chart 2.1). Indeed, the asset growth showed an
uptrend in CY20, like in CY19, after recording a steady deceleration in recent years. The
primary reason for this growth can be attributed to elevated deposit growth.
Among the different banking clusters, SOCBs had higher asset growth compared to CY19
while the rate of growth slowed down in SDBs, FCBs and PCBs (Chart 2.2).Since the SOCBs
accounted for 25.1 percent of the banking sector assets, the higher growth in SOCBs’ assets
(15.6 percent in CY20 compared to 7.1 percent in CY19) boosted the growth of industry asset
in CY20 compared to that of CY19.
CHART 2.1: TOTAL ASSET GROWTH: YEAR OVER YEAR BASIS CHART 2.2: ASSET GROWTH OF BANKING CLUSTERS

14.0% SOCBs
25%
13.0%
20%
13.0% 12.7%
15%
12.4%
10%
11.8%
12.0% 11.6% 5%
SDBs 0% PCBs

11.0%

10.0%
2016 2017 2018 2019 2020 2020

Total Assets Growth 2019

FCBs
Source: DOS, BB; compilation: FSD, BB.

Considering the asset structure in CY20, loans and advances constituted the highest share of
banking sector assets followed by investment. Loans and advances accounted for 63.8
percent (compared to 66.5 percent in CY19) of total assets while investment constituted 18.0
percent (15.4 percent in CY19) as depicted in Chart 2.3.Chart 2.4 shows that growth of loans
and advances moderated in CY20. Following high double-digit growths up to CY19, loans and
advances grew by 8.4 percent in CY20 (11.9 percent in CY19). Demand-side constraints, lower
import-based loan demand due to lower private sector investment in the wake of COVID-19,
and the need to adjust the imbalance between deposit and loan growth in recent years,
among others, might be some reasons behind the slowdown in loan growth in CY20. Though
loans and advances remained the dominant asset type, the banking industry increased its
exposure to investment in Government and other securities, which registered a marked
growth of 32.0 percent in CY20 as opposed to 28.1 percent growth recorded in the preceding
year. Particularly, investment in Government securities increased by around 49.7 percent in
CY20 compared to the increment recorded in the previous year (44.3 percent). The
Government’s higher reliance on bank-based budget financing, safety and security along with
liquidity offered by the instruments might have induced banks to invest heavily in these
instruments. However, if these investments continue to soar in the future, there might be a
possibility of crowding out effect.

Financial Stability Report 2020 21

 CHART 2.3: YEAR-WISE BANKING SECTOR ASSET CHART 2.4: YEAR-WISE GROWTH OF LOANS AND
STRUCTURE ADVANCES AND INVESTMENT IN SECURITIES

66.5%
66.5%
63.8%
60.0%
70.0%
50.0% 49.7%
60.0%
44.3%
40.0%
50.0%

20.4%
30.0%
40.0%

12.0%
18.9%
15.3%

9.2%
20.0%

18.0%
30.0% 14.1%

15.4%
13.4%
20.0% 10.0% 2.9%

7.0%
6.5%
11.9%

6.4%
6.3%
5.9%

5.8%
5.6%

4.7%
4.1%

3.4% -5.9% 8.4%

1.0%
1.0%
0.9%

0.0%
0.4%
0.5%
0.4%

10.0%

0.0% -10.0% -11.5%

-15.6%
-20.0%
2016 2017 2018 2019 2020

Investment in Government securities

Investment in Other securities
2018 2019 2020 Loans & Advances

Source: DOS, BB; compilation: FSD, BB.

Among different categories of banks, SDBs and PCBs had higher shares of loans and advances
(80.2 and 70.2 percent respectively) in their asset mix while the SOCBs possessed the lowest
proportion (48.0 percent).It can be noted that stringent MOUs with BB accompanied by high
NPLs might have induced SOCBs to focus more on money market instruments rather than
expanding loans and advances.
PCBs held a major proportion of earning assets, which might strengthen the stability of the
banking sector through respective asset quality improvement. The overall liquidity
situation of the PCBs also improved as their holding of liquid asset increased.
In CY20, the share of major earning assets9 of SOCBs and SDBs demonstrated marginal
increase, PCBs showed marginal decline while FCBs did not exhibit any change (Chart 2.5)
compared to CY19 positions. The market shares of SOCBs increased by 90 basis points, the
same of PCBs declined by almost same magnitude. However, PCBs still held the highest
market share of the earning asset (around 69 percent), which reflects a positive sign for
financial system stability as the PCBs managed better quality asset and higher capital to
risk-weighted assets ratio compared to those of the SOCBs.
Chart 2.6 demonstrates the market shares of liquid assets of different categories of banks. As
the chart shows, PCBs’ share increased moderately whereas the share slightly declined for the
SOCBs. In particular, PCBs’ share increased by 1.2 percentage points, while the same of the
SOCBs declined by 1.4 percentage points. The higher liquid asset holding should enable the
PCBs to better manage their future liquidity issues amid the COVID-19 pandemic situation.

9
Earning assets include loans and advances and investment. Liquid assets include cash, dues from BB, dues from
banks and FIs and money at call and short notice.

22 Financial Stability Report 2020

 CHART 2.5: SHARE OF EARNING ASSETS OF CHART 2.6: SHARE OF LIQUID ASSETS OF
DIFFERENT CATEGORIES OF BANKS DIFFERENT CATEGORIES OF BANKS

70% 70%

60% 60%

50% 50%

40% 40%

30% 30%

20% 20%

10% 10%

0% 0%
SOCBs PCBs FCBs SBs SOCBs PCBs FCBs SBs
2019 23.1% 69.8% 5.0% 2.1% 2019 25.7% 62.2% 10.6% 1.6%
2020 24.0% 68.8% 5.0% 2.2% 2020 24.3% 63.4% 10.5% 1.7%

Source: DOS, BB; compilation: FSD, BB.

Compared to CY19, the concentration of assets within a few banks increased marginally in
CY20, in tandem with increase in sector-wise loan concentration.
Chart 2.7 shows concentrations of assets within the top (5) five and top (10) ten banks, which
were 31.4 percent and 45.4 percent respectively as of end-December 2020, compared to the
corresponding figures of 30.0 percent and 43.8 percent at end-December 2019. In CY20, top
five banks composed of four SOCBs and one PCB while top (10) ten comprised (6) six PCBs and
(4) four SOCBs respectively. Pertinently, PCBs and SOCBs possessed 67.3 percent and 25.1
percent of total assets of the banking industry while the shares of FCBs and SDBs were only 5.5
and 2.2 percent respectively.

CHART 2.7: TOP 5 AND TOP 10 BANKS BASED ON ASSET SIZE

50%
43.8% 45.4%
45%
40%
35% 30.0% 31.4%
30%
25%
20%
15%
10%
5%
0%
Top 5 Top 10

2019 2020

Source: DOS, BB; calculation: FSD, BB.

In case of sector-wise loan concentration, the calculated Herfindahl-Hirschman Index (HHI) of

1,430.4 points in CY20 indicates a marginal increase in concentration risk from CY19 when the
value of index was 1429.1. In CY20, three sectors-Large Industries, Wholesale and Retail Trade
(CC, OD etc.) and Miscellaneous-had double digit market share i.e., 27.1, 17.9 and 10.8 percent
respectively while another sector verged on two digits. This scenario is very similar to that of
CY19. High market share (27.1 percent) of large industries’ loans indicates that banks were
more engaged in disbursing corporate loans.

Financial Stability Report 2020 23

TABLE 2.2: SECTOR-WISE LOAN CONCENTRATION (CY20) (Amount in billion BDT)
SI. Sector Amountp Percent of Total HHI*
1 Large Industries 2975.46 27.14 736.67
2 Wholesale and Retail Trade (CC, OD etc.) 1957.42 17.86 318.81
3 Miscellaneous 1181.09 10.77 116.07
4 Import Financing (LIM, LTR, TR etc.) 1068.53 9.75 95.00
5 Small and Medium Industries 807.68 7.37 54.28
6 Service Industries 745.76 6.80 46.28
7 Export Financing (PC, ECC etc) 575.42 5.25 27.55
8 Agriculture 458.58 4.18 17.50
9 Housing (Residential) in Urban Area for Individual Person 259.76 2.37 5.61
10 Housing (Commercial): For Developer/Contractor 251.32 2.29 5.26
11 Other Construction 250.23 2.28 5.21
12 Infrastructure Development (Road, Culvert, Bridge, Tower etc.) 94.74 0.86 0.75
13 Air Transport 65.24 0.60 0.35
14 House Renovation/Repairing/Extension 64.99 0.59 0.35
15 Road Transport (Excluding Personal Vehicle & Lease Finance) 47.50 0.43 0.19
16 Lease Financing/Leasing 46.81 0.43 0.18
17 Fishing 45.75 0.42 0.17
18 Water Transport (Excluding Fishing Boats) 32.27 0.29 0.09
19 Housing (Residential) in Rural Area for Individual Person 22.26 0.20 0.04
20 Cottage Industries/Micro Industries 9.53 0.09 0.01
21 Procurement by Government 2.17 0.02 0.00
22 Water-works 0.11 0.00 0.00
23 Forestry and Logging 0.05 0.00 0.00
24 Sanitary Services 0.00 0.00 0.00
Total loans and advances 10962.67 100.00 1430.37
Notes: (1) P: Provisional; (ii) Figures shown in the table excludes Inter bank, Money at call, Bills.
(iii) HHI = Herfindahl-Hirschman Index.
Source: Statistics Department, BB; computation: FSD, BB.

2.3 NONPERFORMING LOANS, PROVISIONS, WRITTEN-OFF LOANS AND

ADVANCES IN THE BANKING SECTOR
Asset quality improved during the latter part of CY20 as gross nonperforming loan (NPL)
ratio showed a conspicuous drop driven by improvement in NPL position of SOCBs, PCBs
and SDBs. However, maintaining asset quality amid the COVID-19 pandemic still seems to
be a key challenge for the banking sector.
To address the adverse impact of COVID-19 on real sector as well as banking sector and to limit
the procyclical impact of loan loss provisions as well as the regulatory capital requirement on
lending, Bangladesh Bank instructed the scheduled banks not to change the Classification
status of the Loans until December 31, 202010 that prevailed on 01 January 2020. However, if
classification status of the loans improves, the same can be taken into account in due course. As
a result, after a sharp decline in December’19 quarter, the gross NPL ratio11 in the banking sector
had no notable changes in December’20 quarter (Chart 2.8). The ratio reached 8.1 percent in
CY20 from 9.3 percent in CY19. However, the amount of gross NPL decreased by BDT 60.5 billion
and reached to BDT 882.8 billion in CY20. Despite the recent improvement, the proper
monitoring of regular loans along with rescheduled loans amid the COVID-19 pandemic may
appear to be a critical challenge for the banking industry. The expected sluggish business
condition due to the Coronavirus outbreak could severely affect the debt–servicing capacity of
the borrowers that may have adverse impact on future performance of the rescheduled as well
as regular loans and could increase the industry NPL rate as well. Though BB has already
extended necessary policy supports to help the borrowers/banks, the success of such policy
supports in minimizing the impact of COVID-19 largely depends on how the borrowers
efficiently use the policy support in withstanding the sock, waves of the pandemic.
10
BRPD Circular No-17 dated September 28, 2020.
11
Total classified loans as a percentage of total loans outstanding.

24 Financial Stability Report 2020

 CHART 2.9: GROSS NPL OF BANKING CLUSTERS
CHART 2.8: GROSS NPL OF BANKING INDUSTRY
(DEC, 2019 AND DEC, 2020)
SOCBs
14.0% 35%
30%
13.0% 11.9% 12.0% 25%
11.7%
12.0% 11.4% 20%
10.8% 15%
11.0% 10.4% 10.3%
10%
10.0% 9.3% 9.2% 5%
9.0% 8.9%
9.0% SDBs 0% PCBs
8.1%
8.0%
7.0%
6.0% Dec-19
June_18

June_19

June_20
Mar_18

Sept_18

Mar_19

Sept_19

Mar_20

Sept_20
Dec_18

Dec_19

Dec_20
Dec-20

FCBs
Source: BRPD, BB; compilation: FSD, BB.

Considering gross NPL ratios of different categories of banks (Chart 2.9), the NPL ratio of
SOCBs registered decline of 2.8 percentage points and reached to 21.0 percent at
end-December 2020. SDBs also demonstrated some improvement as their NPL ratio dropped
by 1.8 percentage points to reach 13.3 percent. Despite these improvements, the NPL ratios
still remained high for both categories of banks especially for SOCBs, which affected the
overall asset quality of the industry. It is mentionable that SOCBs held 47.9 percent of total
NPL of banking industry, for SDBs the ratio was only 4.6 percent and for PCBs the ratio was
45.2 percent. Like SOCBs and SDBs, the NPL ratio of the PCBs also decreased by 1.0 percentage
points and stood at 4.8 percent while the same for FCBs remained almost same at 5.7 percent
at end-December 2020. Though the asset quality of the PCBs improved by only 1.0
percentage point, it was the main driving force for decline in overall NPL in CY20.

CHART 2.10: GROSS NPL RATIO OF INDIVIDUAL Chart 2.10 shows the gross NPL ratio of
BANK (END-DECEMBER 2020) individual banks. Like CY19, the majority of the
100% banks had single digit gross NPL ratio in CY20,
90%
80%
which is a good sign for financial stability.
70% Besides, higher NPL ratios in a few banks, did
60%
50% not appear to be a system-wide phenomenon.
40%
30%
20%
10%
0%
0 10 20 30 40 50 60
Banks

Source: BRPD, BB; computation: FSD, BB.

Chart 2.11 presents the distribution of banks according to the magnitude of NPL ratios.
During 2018-2020, total number of banks has increased to 59 from 57.12 The distribution
shows that, in CY20, number of banks having NPL ratio below 3.0 percent increased
significantly. On the other hand, the number of banks with gross NPL ratios of 10.0 percent or
above was 15 in CY20; unchanged compared to that in CY19. The number of banks having
NPL ratio over 20.0 percent increased by one (01) indicating a relative deterioration in their
asset quality. A total of 9 banks (4 SOCBs, 3 PCBs, 1 SDBs, and 1 FCB) had gross NPL ratio of 20
percent and above during CY20.

12
Considering the availability of NPL data.

Financial Stability Report 2020 25

 CHART 2.11: GROSS NPL RATIO OF BANKS INTO
DIFFERENT BUCKETS
19
18 18

14
13
11
10 10
9 9 9
8
6
5
4
3 3 3
2
1
0

Upto 2% 2% to 3% to 5% to 10% to 15% to 20% and

<3% <5% <10% <15% <20% above

2018 2019 2020

Source: BRPD, BB; Computation: FSD, BB.

It is observed that, in CY20, 38 banks maintained their NPL ratio below 5 percent, in CY19, the
number was 31. All FCBs except 2 (two) and all the PCBs except 4 (four) recorded a single-digit
gross NPL ratio as of December 2020. For the last couple of years, the banks having high NPL
ratio could not bring down the ratio, which might pose concern for the financial system
stability in future. The aftermath of COVID-19 pandemic might aggravate the situation in near
future if not managed prudently. Bangladesh Bank along with other regulatory authorities
has been working rigorously on this particular issue.
The net nonperforming loan (net NPL) ratio13 declined to -1.2 percent at end-December 2020
compared to 1.0 percent recorded in the previous year mainly due to decline in gross NPLs
and as well as increase in maintained provision required by Bangladesh Bank14.
CHART 2.13: NET NPL RATIO OF BANKING CLUSTERS
CHART 2.12: GROSS AND NET NPL RATIO IN CY20
(DEC,2019 AND DEC,2020)

21.0% 2019 2020

6.1%

13.3%
PERCENTAGE POINT

8.1%
5.7%
4.8%
1.32%

1.3%
-0.23%
-1.58%

0.0%
0.01%

-0.1%

0.2%

0.2%

-1.6% -0.2% -1.2%

SCB PCB FCB SDB Total

SCB PCB FCB SDB
Gross NPL Net NPL

Source: BRPD, BB; compilation: FSD, BB. Source: BRPD, BB; compilation: FSD, BB.

Chart 2.12 illustrates that the industry net NPL ratio stood at -1.2 percent at end-December 2020
(1.0 percent at end-December 2019) after netting off both general and specific provision and
interest suspense from gross NPL ratio of 8.1 percent. The significant decline in net NPL ratio
indicates that banking system resilience improved in CY20 compared to the preceding year.
Chart 2.13 shows the changes in net NPL ratio of different categories of banks. Though the
PCBs held the largest share of the industry assets, their net NPL ratio remained considerably
low in CY20. FCBs also had very low net NPL ratio. These banks seem to be fairly resilient

13
Net NPL ratio = (Gross NPLs - Loan-loss Provisions – Interest Suspense)/ (Total Loans Outstanding - Loan-loss
Provisions – Interest Suspense).
14
BRPD Circular Letter No-56 dated December 10, 2020.

26 Financial Stability Report 2020

against any major stability threat originating from deterioration in their asset quality. SOCBs,
on the other hand, was able to bring down their net NPL ratio almost closed to zero (0)
percent. Like other clusters, the net NPL ratios in SBs also improved and declined to 1.3
percent. However, to improve their financial health and keep it stable, these banks need to
bring down their gross NPLs to a manageable level by adopting good governance and better
risk management practices.
In CY20, all banks except three SOCBs, two SDBs and six PCBs maintained loan-loss
provisions as per the regulatory requirement of BB. Top 5 and top 10 banks held nearly 47.5
percent and 65.1 percent of NPLs respectively.
The gross NPLs decreased by BDT 60.5 billion from that of CY19 reach BDT 882.8 billion in
CY20. These NPLs required banks to maintain cumulative provisions of BDT 639.0 billion as of
end-December 2020, against which banks maintained provisions amounting to BDT 637.7
billion (Chart 2.14). The overall provision shortfall in the banking industry stood at BDT 1.3
billion. The maintained provision in CY20, however, was around BDT 91.1 billion higher than
that of CY19. Consequently, the provision maintenance ratio increased from 89.1 percent in
CY19 to 99.8 percent in CY20. Similarly, maintained provision to gross NPL ratio increased
from 57.9 percent to 72.2 percent during the period under review.

CHART 2.14: YEAR-WISE BANKING SECTOR The improvement in the provision mainte-
LOAN LOSS PROVISIONS nance ratio is largely attributable to surplus
700 provision maintained by PCBs and reduc-
600 tion in provision shortfall of the SOCBs. Still,
500 the SOCBs experienced a provision shortfall
400 of BDT 49.2 billion in CY20 (BDT 78.1 billion
In Billion BDT

300 in CY19) and for SDBs, the shortfall was BDT

200 1.7 billion. Besides, 6 PCBs also had provi-
100 sion shortfall, though PCBs as a banking
0 cluster had an aggregate provision surplus
-100 of BDT 46.0 billion in CY20. The provision
-200 shortfall of the banking industry decreased
2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

in terms of both aggregate amount and

Required provision Maintained provision
Surplus/shortfall
number of banks having shortfall in CY20
Source: BRPD, BB; computation: FSD, BB.
from that of CY19.

CHART 2.15: TOP 5 AND TOP 10 BANKS BY GROSS NPL SIZE

Other Banks
34.9%
Other banks Top 5 Banks
52.5% 47.5% Top 5 Banks
Top 10 Banks
Other banks 65.1%

Top 10 Banks Other Banks

Source: BRPD, BB; computation: FSD, BB.

Financial Stability Report 2020 27

The gross NPLs concentration ratios (based on the size of gross NPLs) of the top 5 and top 10
banks were 47.5 and 65.1 percent respectively as of end-December 2020 against the
corresponding figures of 45.8 and 63.3 percent in CY19. In CY20, in terms of NPL size, the top
10 banks comprised of five (5) SOCBs, four (4) PCBs, and one (1) SDB. In terms of gross NPL ratio,
among the top 10 banks, four (4) were SOCBs, four (4) PCBs and one from both SDBs and FCBs.
In CY20, the sector-wise NPL distributions did not show much concentration of NPL in any
particular sector except Trade and Commerce.
Table 2.3 shows a modest concentration of NPLs across different sectors of the economy in
CY20. However, NPL concentration remained high in loans against Trade and Commerce
sector. The share of NPL in this sector nearly (28.0 percent) was considerably high in
comparison with the share of loans distributed in this sector (21.3 percent). Moreover, the
gross NPL ratio of this sector was 2.5 percentage points higher than the industry NPL ratio. As
loans in the Trade and Commerce sector occupied more than one-fifth of the banking sector
loans and advances, this sector’s loans need to be monitored intensively. Pertinently, high
gross NPL ratio (18.4 percent) in the Ship-building and the Ship-breaking sector remained
another major concern.
(AMOUNT IN
TABLE 2.3: SECTOR-WISE NONPERFORMING LOANS DISTRIBUTION (CY20) BILLION BDT)
SL. NAME OF SECTOR TOTAL LOANS GROSS GROSS % SHARE OF % SHARE OF
NO. OUTSTANDING NPL NPL LOANS NPLs OF A
RATIO EXTENDED PARTICULAR
TO A SECTOR
PARTICULAR
SECTOR
1 AGRICULTURE 466.9 44.65 9.56% 4.26% 5.06%
2 INDUSTRIAL (MANUFACTURING):
2.1 RMG 1,308.49 114.51 8.75% 11.94% 12.98%
2.2 TEXTILE 950.89 74.72 7.86% 8.68% 8.47%
2.3 SHIP BUILDING AND SHIP BREAKING 169.81 31.18 18.36% 1.55% 3.53%
2.4 AGRO-BASED INDUSTRY 752.66 65.48 8.70% 6.87% 7.42%
2.5 OTHER INDUSTRIES (LARGE SCALE) 1,560.84 85.23 5.46% 14.25% 9.66%
2.6 OTHER INDUSTRIES (SMALL, MEDIUM 447.89 54.24 12.11% 4.09% 6.15%
AND COTTAGE)
3 INDUSTRIAL (SERVICES):
3.1 CONSTRUCTION LOANS 743.55 45.26 6.09% 6.79% 5.13%
3.2 TRANSPORT AND COMMUNICATION 212.15 18.28 8.62% 1.94% 2.07%
3.3 OTHER SERVICE INDUSTRIES 491.31 30.19 6.14% 4.48% 3.42%
4 CONSUMER CREDIT:
4.1 CREDIT CARD 58.59 3.16 5.39% 0.53% 0.36%
4.2 AUTO (CAR) LOAN 22.05 0.45 2.04% 0.20% 0.05%
4.3 HOUSING FINANCE 189.55 8.53 4.50% 1.73% 0.97%
4.4 PERSONAL 358.43 7.06 1.97% 3.27% 0.80%
5 TRADE AND COMMERCE (COMMERCIAL 2,330.56 247.00 10.60% 21.27% 27.99%
LOANS)
6 CREDIT TO NBFI 77.17 5.10 6.61% 0.70% 0.58%
7 LOANS TO CAPITAL MARKET 52.81 0.86 1.63% 0.48% 0.10%
8 OTHER LOANS 761.11 46.46 6.10% 6.95% 5.27%
TOTAL 10,954.80 882.36 8.05% 100% 100%
Source: Scheduled Banks and DOS, BB; compilation: FSD, BB.

28 Financial Stability Report 2020

‘Bad and Loss’ category of loans to gross NPL ratio increased marginally in CY20 compared
to that of CY19 and remained high in CY20.
In CY20, the percentage of Bad & Loss (B/L) loans to gross NPL increased to 86.9 percent
compared to 86.8 percent in CY19. This high B/L loan ratio indicates that a major portion of the
NPL has not been performing for a longer period. This legacy issue needs to be resolved for the
improvement of the stability condition of the banking sector. The other two categories of
classified loans, sub-standard (SS) and doubtful (DF) constituted 7.7 percent (9.1 percent in
CY19) and 5.4 percent (4.1 percent in CY19) of the total NPL respectively as shown in Chart 2.16.

CHART 2.16: GROSS NPL COMPOSITION IN CY20 CHART 2.17: YEAR-WISE RATIOS OF THE THREE
CATEGORIES OF NPLs
100 12.0

7.7% 5.4% 10.0

Gross NPL ratio in percent

SS, DF and BL in percent
80
8.0
60
6.0
40
86.9% 4.0
20 2.0

0 0.0

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Sub-standard loans to gross NPLs
Doubtful loans to gross NPLs
Sub-standard Doubtful Bad & Loss Bad loans to gross NPLs
Gross NPLs to total loans
Source: BRPD, BB; computation: FSD, BB.

Chart 2.17 illustrates that the proportion of bad and loss (B/L) loans has been increasing since
2012 and remained above 80 percent of the gross NPL over the years, implying slow recovery
from bad loans. Higher B/L loans adversely affect profitability and capital base of the banks
since banks have to maintain 100 percent provision against such loans. The total B/L loan of
the banking sector reached to BDT 767.5 billion in CY20 (BDT 818.8 billion in CY19). Though
B/L loans decreased by BDT 51.3 billion in CY20, it still accounts for the major part of the NPLs
which indicates that total NPL is mostly comprised of the worst category of classified assets.

BOX 2.1: PROCEDURE OF WRITING OFF OF LOANS/INVESTMENTS OF BANKS

During the normal course of business, some portion of loans/investments of banks might
become non-performing and remain unadjusted for a longer period owing to various
plausible risks. Those loans/investments may overstate the balance sheets by
accumulating bad assets years together. Such exposures of banks are often required to be
written off following standard procedures and internationally recognized norms.
Banks in Bangladesh are advised to write off their loans/investments complying with the
prescribed policiesa of Bangladesh Bank. As per the existing rules, a bank can write off only
those loans/investments which have minimum chance of recovery and remained
classified as ‘Bad/Loss’ at least for three years in a row and for which the bank has
maintained 100 percent provision, by adjusting interest suspense from the outstanding
balance. If the maintained provision against such loans/investments is not enough, the
remaining provision must be ensured by debiting current year’s income of the concerned
bank. However, a bank cannot write off partial amount of the total loans/investments.

a
BRP Circular No. 01/2019 dated 06 February 2019.

Financial Stability Report 2020 29

 BOX 2.1: PROCEDURE OF WRITING OFF OF LOANS/INVESTMENTS OF BANKS (Contd.)

Importantly, prior to the writing off of the loans/investments, it is mandatory for banks to
file lawsuits against the respective defaulters. However, if lawsuit is not mandatory under
the provisions of Money Loan Court Act 2003, banks can write off any loans up to BDT 0.2
million without filing any lawsuit. Besides, writing off of the loans/investments must be
approved by the board of directors of the concerned bank. Moreover, the amount of claim
of the written off loans/investments will in no way vanish due to setting aside the
loan/investment from the balance sheet of the bank.
Banks have to maintain a separate ledger for the written-off loan/investment accounts
and need to report to their balance sheets in accordance with section 38 of the Bank
Company Act, 1991. Albeit written-off, the respective borrower will be treated as a loan
defaulter unless and until he/she repays the full liability of the concerned
loan/investment. It is worth noting that written-off loans/investments cannot be
rescheduled or restructured; however, if such loans/investments remain under any exit
plan, the concerned bank may fix repayment periods.

The outstanding balance of written-off loans stood at BDT 441.53 billion at the
end-December 2020.
Classified loans amounting BDT 568.45 billion were written-off from the banks’ balance sheet
till December 202015, which was BDT 560.2 billion at the end of CY19. The cumulative
written-off amount roughly accounted for 3.1 percent of the banking sector’s on-balance
sheet assets at end-December 2020. However, out of the total written-off loans, banks have
been able to recover BDT 126.9 billion till end-December, 2020 and thus the outstanding
balance of written-off loans stood at BDT 441.53 billion out of which written-off loans of
SOCBs, PCBs, FCBs, and SDBs account for BDT 174.83 billion, 252.59 billion, 10.36 billion and
3.75 billion respectively16.
2.4 RESCHEDULED ADVANCES
The amount of loans rescheduled in the review year has decreased as compared to the
preceding year which could partly be attributed to BB’s policy supports during the
pandemic. However, the cumulative amount of total outstanding of rescheduled loans was
still high compared to CY19. Intensive monitoring is warranted to ensure timely recovery
of these loans and thus to lessen the pressure on the banking system.
In CY19, Bangladesh Bank, vide BRPD circular no. 05, dated 16 May 2019, has issued a special
policy on loan rescheduling and a one-time exit policy to address the issue of the
long-standing bad loans which were affected due to adverse circumstances. Besides, to
address the adverse impact of COVID-19 pandemic on the real sector as well as banking
sector, Bangladesh Bank has relaxed loan classification and recovery policy17 in CY20 which
permits the banks not to classify new as well as rescheduled loans since the onset of
COVID-19. As a result, the amount of loans rescheduled has decreased in CY20.

15
Source: BRPD, BB. Provisional data has been used.
16
Despite the loans being written off, the legal procedures against the defaulted borrowers continue and
initiative persist by the banks for successful recovery of those loans.
17
BRPD Circular No. 17 dated 28 September 2020.

30 Financial Stability Report 2020

 CHART 2.18: RESCHEDULED LOAN RATIO TREND CHART 2.19: TREND OF RESCHEDULED LOAN
18.0%
16.0% 2.9% 2.6% 600.0 527.7
14.0%
500.0

11.8%
12.0% 3.1%

11.2%
2.5%
2.7%

BDT in billion
10.0% 400.0
8.0%

8.0% 300.0 232.1

7.5%
7.1%
191.2
6.0% 154.2 134.7
200.0
4.0%
2.0%
100.0
0.0% -
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020

RSDL Loan Ratio CRSDL Ratio Rescheduled loans (in Billion)

Source: Scheduled Banks (provisional); computation: FSD, BB.

At the end-December 2020, the loans that had been rescheduled for at least once reached 14.4
percent of banking sector’s total outstanding loans. Noteworthy that, 82.0 percent of that
rescheduled loans remained unclassified. Chart 2.18 shows the trend of rescheduled loan ratio
along with the portion of unclassified rescheduled loan (URSDL) ratio and the non-performing
(or classified) rescheduled loan (CRSDL) ratio18 of last five years. The graph reveals an upward
trend of rescheduled loans in the banking system since 2017. In CY20, the total rescheduled loan
ratio increased by 26 basis points from CY19. Notably, CRSDL decreased by 0.3 percentage point
against the 0.6 percentage points increment observed in URSDL ratio during this review year.
Chart 2.19 shows the trend of classified loans, which were rescheduled in the past five years.
In CY16, the total rescheduled loan was BDT 154.2 billion which stood at BDT 134.7 billion in
CY20. Compared to CY19, rescheduled loans registered a decrease of 74.5 percent in CY20.
Chart 2.20 illustrates the sector-wise composition of rescheduled loans at end-December 2020.
Rescheduled loans in the industrial sector (regardless of the size of the industries) were 31.1
percent while the percentage was 8.1 in the working capital category. RMG and textile sector
accounted for 20.8 percent of the industry’s rescheduled loans. Among the other loans
categories, commercial loans, construction, other non-specified sectors (including
ship-building and ship-breaking, transportation and communication and consumer credit,
etc.) and foreign trade (export credit, import credit, and loans against trust receipts) shared 9.2
percent, 6.0 percent, 11.5 percent and 8.3 percent of the total rescheduled loans respectively.
CHART 2.20: SECTOR-WISE RESCHEDULED LOAN COMPOSITION CHART 2.21: SECTOR-WISE RESCHEDULED LOAN RATIO
32.0%
30.0%

35.0%
11.5%
8.3% 30.0%
20.4%

31.2%
19.2%
18.8%

9.2%
18.0%

25.0%
15.5%

13.4%

8.1% 20.0%
11.2%
10.6%

9.2%
9.2%

8.9%

15.0%
8.8%
7.2%

5.0%
5.9%

6.0% 10.0%
20.8%
5.0%
0.0%
Others
Industrial

Comm

Cons
F. Trade
W. Capital
Agri

RMG

RMG & Textile Ind. Loan Others Foreign Trade

Commercial Loans Working Capital Agriculture Construction 2019 2020

Source: Scheduled Banks (provisional); computation: FSD, BB.

18
Rescheduled loan ratio= Total rescheduled loans to total loan outstanding; Unclassified loan ratio= total
unclassified rescheduled loans to total loan outstanding; Classified loan ratio= total classified (non-performing)
rescheduled loans to total loan outstanding.

Financial Stability Report 2020 31

The rescheduled loan ratio of the industrial sector ranked top among all the sectors (Chart
2.21) with 30.0 percent in CY20 followed by RMG, agricultural, construction and foreign trade
sectors with 20.4, 18.8, 13.4 and 10.6 percent respectively. The rescheduled loan ratio in each
of the remaining sectors was less than 10 percent.
Chart 2.22 demonstrates the sector-wise non-performing rescheduled loan ratio. Although
10.6 percent of foreign trade loans have been rescheduled, 24.3 percent of them remained
non-performing. The non-performing rescheduled loans ratio of RMG, commercial, working
capital, industrial and construction sectors were 23.3, 19.3, 18.9, 17.1 and 14.7 percent
respectively. However, non-performing rescheduled loans in the agricultural sector was
relatively lower (5.1 percent).
CHART 2.22: SECTOR-WISE NON-PERFORMING
RESCHEDULED LOAN RATIO

25.9%

25.9%

25.0%
24.3%

23.3%
30.0%

19.3%
19.1%

18.9%

18.6%
25.0%
18.1%
17.1%

15.8%
14.7%
20.0%

12.4%
15.0%
6.0%
5.1%

10.0%

5.0%

0.0%

Others
Industrial

Comm

Cons
Agri

F. Trade
W. Capital

RMG
2019 2020

Source: Scheduled Banks (provisional); computation: FSD, BB.

Chart 2.23 exhibits the share of rescheduled loans to large, medium, small, and micro and
cottage industries. As of December 2020, 61.0 percent of total rescheduled loans amounting
to BDT 1016.1 billion was under large industries. Shares of medium, small, micro and cottage,
and other industries were 14.3 percent, 8.3 percent, 2.1 percent and 14.2 percent respectively.

CHART 2.23: INDUSTRY-WISE RESCHEDULED LOAN CHART 2.24: INDUSTRY-WISE RESCHEDULED

COMPOSITION LOAN RATIO
23.8%

30.0%
21.2%

61.0% 25.0%
18.3%
17.5%

16.0%

20.0%
13.3%
13.2%
11.6%

14.3%
15.0%
7.2%
6.6%

8.3% 10.0%
14.2%
5.0%

2.1% 0.0%
Large Medium Small Micro and others
cottage
Large Medium Small Micro and cottage others 2019 2020

Source: Scheduled Banks (provisional); computation: FSD, BB.

Chart 2.24 illustrates the industry-wise rescheduled loan ratio at end-December 2020. The
highest rescheduled loan ratio was observed in medium industries with 23.8 percent followed
by large, micro and cottage, small and other industries with 18.3, 13.3, 11.6, and 6.6 percent
respectively. The ratios for large and medium were higher than the previous year while the
ratios decreased for small, micro and cottage, and others industries in CY20.

32 Financial Stability Report 2020

 CHART 2.25: INDUSTRY-WISE NON-PERFORMING Chart 2.25 illustrates the indus-
RESCHEDULED LOAN RATIO try-wise non-performing resched-
uled loan ratio. Although only 18.3

48.5%
60.0%

44.9%

43.9%
43.8%
percent of loans in large industries

38.8%
50.0%
were rescheduled, 48.5 percent of

33.3%
40.0%
these rescheduled loans remained

26.4%
23.0%

18.7%
30.0%
non-performing. Non- performing

12.2%
20.0% rescheduled loans in medium
10.0% industry was 43.8 percent followed
0.0%
by micro and cottage, small and
Large Medium Small Micro and others other industries, which accounted
cottage
2019 2020 for 38.8, 23.0, and 12.2 percent
Source: Scheduled Banks (provisional); computation: FSD, BB. respectively.
At end-December 2020, PCBs possessed the highest amount of rescheduled loans, which
accounted for 59.6 percent of total rescheduled loans of the banking industry. During the
same period, shares of SOCBs, SDBs, and FCBs in industry's aggregate rescheduled loans were
35.6, 4.2, and 0.5 percent respectively (Chart 2.26).
CHART 2.26: BANK CLUSTER-WISE RESCHEDULED CHART 2.27: BANK CLUSTER-WISE RESCHEDULED
LOAN COMPOSITION LOAN RATIO

26.4%
26.8%

25.9%
30.0%

23.3%
25.0%
59.6%
24.1%
23.8%

35.6%
23.2%

20.0%

11.6%
11.3%

19.7%
15.0%

13.8%
10.0%

11.5%

1.9%
1.6%
5.0%
7.9%

2.8%
7.2%
6.9%

2.3%
2.5%
4.2%

0.5%

0.0%
SOCBs PCBs SDBs FCBs
SOCBs PCBs FCBs SDBs 2016 2017 2018 2019 2020
Source: Scheduled Banks (provisional); computation: FSD, BB.

However, Chart 2.27 reveals that the SOCBs, at end-December 2020, ranked top with
rescheduled loan ratio of 26.8 percent followed by SDBs with 23.3 percent. The ratios were
11.6 percent and 1.6 percent respectively for PCBs and FCBs. This ratio increased for all bank
clusters except FCBs and SBs in 2020.

CHART 2.28: TOP 5 AND TOP 10 BANKS BY RESCHEDULED LOAN SIZE

100% 100%
90% 90%
29.4%

31.9%
33.1%
36.4%

36.4%
45.5%

80% 80%
49.5%
54.7%
55.6%

55.6%

70% 70%
60% 60%
50% 50%
40% 40%
70.6%

68.1%
66.9%
63.6%

63.6%
54.5%

30% 30%
50.5%
45.3%
44.4%

44.4%

20% 20%
10% 10%
0% 0%
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020

Top 5 banks Other banks Top 10 banks Other banks

Source: Scheduled Banks (provisional); Computation: FSD, BB.

Financial Stability Report 2020 33

Chart 2.28 highlights the concentration of outstanding rescheduled loans among the top 5
and top 10 banks. At end-December 2020, the top 5 banks held 50.5 percent of total
outstanding rescheduled loans, while share of the top 10 banks was 68.1 percent. The top 5
banks comprised of two SOCBs and three PCBs and the top 10 banks included three SOCBs, six
PCBs, and one SDB.
CHART 2.29: DISTRIBUTION OF BANKS BY RESCHEDULED Chart 2.29 shows the distribution of
LOAN RATIO
banks by rescheduled loan ratio. The
25
21
rescheduled loan ratio was between 5 to
20
10 percent for 23 banks of which 21 banks
are PCBs. The ratio was within two percent
No. of banks

15 for 12 banks, comprised of four PCBs,

seven FCBs and one SDB. In CY20, 40
10 7 7 banks had rescheduled loans ratio below
5
5
4 4 4 10.0 percent and 19 banks had it above 10
0
1 1
0 0 0
1 1 1
0 0
1 1 percent ratio. However, in CY19, 39 banks
0 had this ratio below 10 percent and 20
Up to 2% 2% to <5% 5% to 10% to Above 20%
<10% <20% banks had it above 10 percent ratio.
SOCBs PCBs FCBs SDBs

Source: Scheduled Banks (provisional); computation: FSD, BB.

Loan rescheduling, in accordance with BB’s policies and guidelines, aims to facilitate
distressed borrowers to sustain during their critical times. The ultimate objective is to provide
the borrowers (assumed to have the potential) with the opportunity to revive and regain their
earning capability. Despite the essence of prudent loan management, the accumulation of
rescheduled loans in the banking system may eventually create pressure on the profitability
and solvency of the banks. Therefore, rigorous monitoring and implementation of stringent
measures for recovery of loans has utmost importance in minimizing downside risks in the
entire banking system.
2.5 LIABILITY STRUCTURE OF THE BANKING SECTOR
At end-December 2020, the deposit growth rate (13.6 percent) exceeded the loan growth
rate (8.4 percent) and the Off-balance sheet (OBS) to On-Balance sheet asset ratio
decreased to 27.8 percent. To keep pace with the growth momentum and to ensure
sustainable growth, banks should utilize their increased deposit base and extend credit to
the thriving private sector.
At end-December 2020, the total liabilities of the banking sector stood at BDT 17,312.3 billion.
Deposits, the major portion of total liabilities of the banking sector, grew steadily over the last
couple of years. At end-December 2020, total deposits increased by 13.4 percent (11.3 percent
in CY19). However, after netting off interbank deposit, deposit growth stood at 13.6 percent.
Interbank deposit growth picked up marginally in CY20. BB’s various policy supports and
sizeable refinance schemes, reduction in CRR along with strong foreign remittance growth,
and reduction in service charges on deposit products, among others, were some of the key
reasons behind the rise in deposit growth during the review period amidst the COVID-19
pandemic. However, higher deposit growth provides banks with options for greater asset
growth and also provides banks with enough cushions to manage their liquidity.
The share of total deposits to total liabilities at end-December 2020 stood at 81.5 percent
which was 81.6 percent in CY19 (Chart 2. 30).

34 Financial Stability Report 2020

 CHART 2.30: YEAR-WISE BANKING SECTOR CHART 2.31: YEAR-WISE GROWTH OF DEPOSITS AND
LIABILITY STRUCTURE BORROWINGS FROM BANKS AND FIS (UPDATED CHART)
80.0%

82.0%
81.6%
81.5%
90.0% 67.8%
80.0% 60.0%
70.0%

41.8%
41.5%
39.3%
60.0% 40.0% 36.0%
50.0%
40.0%
17.6%

20.0%
17.0%
16.6%

16.5%
16.2%
16.1%

10.7%
10.6%
10.5%
30.0%

6.8%
6.6%
6.4%
20.0% 3.7%

1.1%
1.1%
1.0%
0.0%
10.0%
0.0% 2017 2018 2019 2020
-20.0% -20.5%

-40.0%
Borrowings from banks & Fis Current Deposit
Savings Deposit Term Deposit
Interbank Deposits
2018 2019 2020
Source: DOS, BB; compilation: FSD, BB.

Among the various deposit categories, current deposits recorded the highest growth of 24.0
percent in CY20 (8.8 percent in CY19) while savings and term deposits grew by 18.9 percent
(9.9 percent in CY19) and 6.7 percent (12.6 percent in CY19) respectively (Chart 2.31).
Borrowings from banks and FIs grew by 17.5 percent (14.8 percent in CY19) whereas interbank
deposit increased by 3.7 percent (-20.5 percent in CY19). It is also notable that all the major
deposit segments surpassed the previous year’s (CY19) growth except the growth in term
deposits. Lower rate on term deposits may be the reason behind the slow growth in term
deposits. As most of the banks had enough liquidity to finance their day-to-day operations,
some of the banks invested the excess fund with other banks which resulted in positive
growth in interbank deposits after a sharp fall in CY19. To promote investment and to
continue the growth momentum in the country, banks should continue to strive for higher
deposit collection at an affordable rate to support adequate credit supply and to avoid credit
rationing in the future.
The deposit growth rate (excluding interbank deposits) exceeded the loan growth rate,
which showed the positive gap between outstanding deposits and loans in CY20.
At end-December 2020, deposit growth (excluding interbank) stood at 13.6 percent,
exceeded the loans growth (8.4 percent) like the CY19 (Chart 2.32). As a result, the gap
between outstanding deposit and loans widened considerably to BDT 2,047.5 billion in CY20
from BDT 1,307.4 billion in CY19 (Chart 2.33). This improved liquidity scenario indicates that
banking system had a reasonable amount of liquid fund to fulfill the growing loan demand.
However, even with higher deposit growth, the loan growth of 8.4 percent indicates cautious
stance of the banks. The slower loan growth could also be attributed to the sluggishness in
overall investments in the country caused by outbreak of the COVID-19. In order to maintain
profitability and utilize their extra liquidity, banks opted for secured alternative, i.e., increased
investment in government securities. However, to keep pace with the growth momentum
and to ensure sustainable growth, banks need to utilize their increased deposit base and
ensure smooth credit flow to the thriving private sector.

Financial Stability Report 2020 35

 CHART 2.32: YEAR-WISE LOANS AND DEPOSIT GROWTH CHART 2.33: LOANS AND DEPOSITS OUTSTANDING
20.0% 18.9% 16,000.0
13,797.4
18.0% 14,000.0
12,144.2
16.0% 15.3%
14.1% 12,000.0 10,798.7

In Billion BDT
11,750.0
9,834.2 10,836.8
14.0%
12.5% 10,000.0 8,892.0
9,687.2
13.6%
12.0% 11.9%
12.7% 8,487.2
8,000.0
10.0% 7,136.0
10.6%
9.8% 8.4% 6,000.0
8.0%
4,000.0
6.0%
2016 2017 2018 2019 2020
2016 2017 2018 2019 2020

Total Loans & Advances Total Deposits (excluding Interbank) Total Loans & Advances Total Deposits (excluding interbank)

Source: DOS, BB; compilation: FSD, BB.

CHART 2.34: GROWTH OF LOANS AND ADVANCES Chart 2.34 compares the deposit and loan
AND DEPOSITS BY BANK CLUSTERS growth of four banking clusters in CY20.
SOCBs
20% Loans & Advances Growth
Only SDBs had lower deposit growth than
15% Total Deposit Growth loan growth, whereas other clusters had
10% substantially higher deposit growth com-
5% pared to loan growth. It seems that
SDBs 0% PCBs sluggish private investment caused by the
ongoing pandemic and various contain-
ment measures relating the pandemic led
to lower demand for loans and higher
tendency to save.
FCBs
Source: DOS, BB; computation: FSD, BB.

At end-December 2020, the share of CHART 2.35: BANKING SECTOR’S DEPOSIT SHARE BY
different kinds of deposits remained TYPES OF ACCOUNTS
almost similar to those of CY19 (Chart
2.35). Term deposits constituted almost Other
half of the total deposits. Its share deposits
Current
9.3%
decreased slightly to 48.2 percent in CY20 deposits
21.6%
(51.2 percent in CY19). This might be due
to lower interest rates provided by the Term Savings
deposits deposits
banks compared to previous years. Shares 48.2% 20.9%
of current deposits, savings deposits and
other deposits were 21.6 percent, 20.9
percent and 9.4 percent respectively.
Higher proportion of term deposits
provides banks with more stable source of
funding, thereby promoting financial Source: DOS, BB; compilation: FSD, BB.

stability.
Concentration of deposits (excluding interbank) in the top five (5) and top ten (10) banks in
CY20 increased compared to CY19 (Chart 2.36). These banks accounted for 33.2 percent and
47.4 percent of total deposits respectively during CY20, compared to 31.4 percent and 45.3
percent in CY19. Four (4) SOCBs and one (1) PCB were listed as the top five (5) in terms of
deposit holding.

36 Financial Stability Report 2020

 CHART 2.36: TOP 5 AND TOP 10 BANKS BASED ON SIZE OF DEPOSIT

Top 5 bank’s
33.2%
Other bank’s Top 10 bank’s
Other bank’s 47.4%
52.6%
66.8%

Source: DOS, BB; compilation: FSD, BB.

The off-balance sheet (OBS) asset to on-balance sheet asset ratio decreased in CY20
compared to that of the preceding year, which could be partly attributed to negative
import growth in the review year. Lower OBS exposure might reduce the liquidity risk.
Financial stability risk might arise from off-balance sheet items as well, if it is not monitored
properly. The aggregate balance of OBS items was on an increasing trend. The balance was
BDT 5,111.9 billion at the end of CY20, which was BDT 4,808.0 billion at the end of CY19. But
the OBS to on-balance sheet asset ratio demonstrated the decreasing trend since CY18. This
ratio stood at 27.8 percent in CY20 which was 29.5 percent in CY19 (Chart 2.37).
CHART 2.37: OFF-BALANCE SHEET ASSET TO ON-BALANCE Chart 2.37 exhibits that OBS
SHEET ASSET RATIO
exposures to the total asset
34.7% ratio of the banking sector was
36.0% 33.9%
a bit higher in CY17 and CY18,
34.0%
primarily due to rise in import
32.0% 29.5%
financing. However, as the
30.0% 27.8% ratio declined notably in CY19
28.0% 25.5%
and CY20, the risks from OBS
26.0%
items seemed to be lower.
24.0%
22.0%
20.0%
2016 2017 2018 2019 2020

Source: DOS, BB; compilation: FSD, BB.

2.6 BANKING SECTOR DEPOSIT SAFETY NET

As per the existing law, every depositor will get an insurance coverage equal to the amount
of his/her deposit but not exceeding BDT 100,000 in case of winding up of a bank. Under
this coverage 91.0 percent of the total depositors are fully insured. However, 23.9 percent
of the total deposits of the entire banking system are insured under Deposit Insurance
Trust Fund (DITF) at end-December 2020.
Deposit insurance system (DIS) plays a crucial role in maintenance of financial stability by
protecting depositors’ interest, particularly small depositors have safety net of their deposits
in case of closure or liquidation of a bank. It also helps to reduce the probability of bank runs
by increasing public confidence in the banking system. The deposit insurance system in
Bangladesh is now being administered by the “Bank Amanat Bima Ain, 2000”. In accordance to
the Act, Bangladesh Bank (BB) is authorized to carry out a fund called Deposit Insurance Trust
Fund (DITF) and the Board of Directors of BB acts as the Trustee Board of the DITF. This fund is

Financial Stability Report 2020 37

formed mainly with the premiums from its member banks and income accrued from investing
it in different government securities. All the scheduled banks are members of this scheme and
their premium rate is determined on the basis of their health. Under the existing deposit
safety net program, maximum BDT 100,000 of each depositor is guaranteed in case of
liquidation of a bank. In order to provide more protection to depositor’s interest, a draft law
named “Amanat Surakkha Ain” has been prepared and sent to the Ministry of Finance for
finalization. In the draft law, a proposal for deposit insurance coverage limit from BDT 100,000
to BDT 200,000 along with inclusion of Non-Bank Financial Institutions (FIs) under the
umbrella of DIS have been suggested.
The amount at the DITF reached BDT 101.15 billion at end-December 2020 which was almost
double of the end-December 2016 and 15.6 percent higher than that of end-December 2019
(Table 2.4). Despite having steady progression of premium collection and investment income,
the existing balance of DITF stood only 0.89 percent of the total deposits of the banking
system at end-December 2020. The recent position of DITF is shown below:
TABLE 2.4: DEPOSIT INSURANCE TRUST FUND AND ITS COMPOSITION
(Amount in Billion BDT)
Particulars 2016 2017 2018 2019 2020
Insurable Deposits 7918.17 8334.27 9051.76 10164.92 11343.97
Insurance Premium (during the year) 4.6 5.07 5.49 6.01 6.79
Deposit Insurance Trust Fund Balance 53.74 64.02 74.28 87.48 101.15
i. Investment 53.73 63.98 74.24 87.42 99.69
ii. Cash 0.0086 0.042 0.041 0.053 1.46
Source: DID, BB.

CHART 2.38: SAFETY NET ON BANKING SECTOR DEPOSITS

The scenario of deposit safety net is
illustrated in Chart 2.38. The insured
100.0% 88.7% 92.1% 92.1% 91.0% amount19 of total insurable deposits has
increased slightly from 23.1 percent in
80.0% CY19 to 23.9 percent in CY20. The
60.0% insurable deposits with the banks grew
11.6 percent in CY20 whereas the growth
40.0% 23.1%
24.4% 23.0% 23.9% was 12.3 percent in CY19. Importantly,
20.0% 91.0 percent of the total depositors
0.0%
(depositors with deposit amount up to
CY 17 CY 18 CY 19 CY 20 BDT 100,000) of the entire banking
Insured amount Fully insured depositors
system are fully insured within this
deposit insurance system which indicates
Source: DID, BB; Computation: FSD, BB. a comprehensive deposit safety net for
the small depositors.

19
The insured amount refers to the aggregate figure considering the deposits up to BDT 100,000 per depositor of
each bank.

38 Financial Stability Report 2020

 CHART 2.39: PROTECTION OF DEPOSITORS ON ENHANCEMENT Chart 2.39 shows the coverage of fully
OF INSURED DEPOSIT COVERAGE LEVEL insured depositors considering the
relevant existing and proposed Act.
100.0%
The percentage of fully insured
95.1%
depositors may increase to 95.1
95.0% 91.0%
percent of the total depositors if the
90.0% deposit insurance coverage limit of
85.0% per depositor is extended from BDT
100,000 to BDT 200,000.
80.0%
With Deposits upto BDT With Deposits upto BDT
100000 200,000 (Hypothetical)
Fully Insured Depositors in CY20
Source: DID, BB; Computation: FSD, BB.

Financial system in Bangladesh is mainly dominated by the banking sector. Under the deposit
safety net program in Bangladesh, majority of the depositors (91 percent) are fully insured.
However, it is expected that proposed Act will play a great role to enhance the deposit safety
net program and thereby contribute to financial stability.
BOX 2.2: THE CAPACITY OF EXISTING DITF AND ITS FORECAST
The capacity of the DITF seems to be adequate in single bank liquidation. Chart B2.Y.1 and B2.Y.2 illustrate that the fund
from the DITF will be enough to liquidate three PCBs chosen based on the highest gross non-performing loan (GNPL)
ratio20 in the banking industry at end-December 2020. Under the current insured deposit level using only 3.2 percent of
the current balance. The current balance will also be sufficient if the insured deposit level is doubled.
Chart B2.2.1: Utilization of fund from DITF to liquidate Chart B2.2.2: Utilization of fund from DITF to liquidate
three private commercial banks at current insurance three private commercial banks at insurance level of
level of BDT 100,000. BDT 200,000.
0.5% 1.9% 0.9% 3.5%
0.8% 1.6%

96.8% Problem Bank 1 Problem Bank 1

Problem Bank 2 Problem Bank 2
Problem Bank 3 94.0% Problem Bank 3
DITF Balance (unused) DITF Balance (unused)
Source: DID, BB; Compilation: FSD, BB.
Chart B2.Y.3 illustrates that the DITF can compensate up to 35 small banks’ insured deposits (up to BDT 100,000 per
depositor) in the case of either single bank liquidation or a series of banks’ liquidation. Here, the banks are arranged
in an ascending order of their corresponding deposit size, irrespective of the category. However, a significant number
of banks’ depositors may not be fully compensated (hypothetical scenario) with the current balance of DITF due to
the larger deposit bases of those banks.
Chart B2.2.3: Optimum number of small banks can be Chart B2.2.4: Forecasted Depositors' Safety Net in next
liquidated using fund from DITF. 5 years (Billion BDT)
120000.0 200.0
167.35188.93
180.0
100000.0 148.00
160.0 130.38
80000.0 140.0 114.6
In Billion BDT

120.0 101.2
In Million BDT

60000.0 87.5
100.0 74.2
64.0
40000.0 80.0 53.7
44.6
60.0 36.3
20000.0
40.0
0.0 20.0
0 5 10 15 20 25 30 35 0.0
-20000.0
Number of banks (ascending order of deposit base) CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21 CY22 CY23 CY24 CY25
Cumulative Insured deposit (1-100,000) DITF Balance DITF Balance DITF Balance (forcasted)

Source: DID, BB; Compilation: FSD, BB.

It worth mentioning that there is no history of bank liquidation in Bangladesh. After the incorporation of deposit
insurance system in 1984, the DITF has grown over time, exceeding BDT 101.15 billion at end-December 2020. Assuming
no bank failure and no requirement of fund for liquidation in next 5 years, the fund may reach BDT 189 billion in 2025.

20
Gross NPL to total loans ratio.
Financial Stability Report 2020 39
2.7 BANKING SECTOR PROFITABILITY
Net profit after taxes of the banking sector declined in CY20 as compared to that of CY19.
Banking sector’s operating profit21 stood at BDT 256.1 billion in CY20 from BDT 278.4 billion in
CY19, recording a 8.0 percent reduction from the previous year. Net profit decreased by 33.2
percent from BDT 69.8 billion in CY19 to BDT 46.6 billion in CY20. Though total non-interest
income increased by 24.5 percent (i.e., BDT 73.5 billion), the net income decreased mainly due
to reduction in interest income by 9.4 percent (i.e., BDT 93.84 billion) despite the improve-
ment in asset quality in this review year. Ceiling on interest rate22, adverse economic situation
due to COVID-19 pandemic along with the restriction on charging interest on interest
accrued23 during COVID-19 period might be some key reasons of such reduction in interest
income of the banks.
ROA and ROE of the banking industry decreased in CY20 as compared to those of CY19.
Both Return on Assets (ROA) and Return on Equity (ROE) of the banking industry declined in
the review period. Despite the improvement in asset quality along with 13.0 percent growth
in total assets, the net income decreased which led the ROA and ROE to fall down in the
review period. The ROA of banking sector declined to 0.3 percent in CY20 from 0.4 percent in
CY19 while the ROE declined to 4.3 percent from 6.8 percent in CY19.
CHART 2.40: BANKING SECTOR RETURN ON ASSET (ROA) CHART 2.41: BANKING SECTOR RETURN ON EQUITY (ROE)

60 54 55 25 23
51
19 19 19
50 20 18

40 14
No. of Banks
No. of Banks

15 13
12
11
30 10
9
10 7
20

4 5
10 3 2 2
1 0 1 1 0
0 0
Up to 2.00% > 2.00 to >3.00 to 4.00 >4.00 Up to 5.00% > 5.00 to >10.00 to >15.00
3.00 10.00 15.00
2018 2019 2020 2018 2019 2020

Source: DOS, BB, Compilation: FSD, BB.

In the review year, ROA of 27 banks increased while it declined in 32 banks. Similarly, ROE also
increased in 27 banks while it declined in 32 banks. Notably, 93.2 percent of the banks had
ROA below 2.0 percent (Chart 2.40) and 64.4 percent of the banks had ROE below 10 percent
(Chart 2.41).
In CY20, the overall Net Interest Margin24 of the banking industry decreased to 1.4 percent
from 2.1 percent in CY19.
Total interest income decreased substantially by 9.4 percent whereas the interest expense
decreased marginally by 0.8 percent in CY20. On the other hand, non-interest income
increased by 24.5 percent in the review year compared to the preceding year primarily driven
by the rising investment income due to rapid accumulation of investment in the government
securities.
21
profit before provision and tax.
22
BRPD Circular No-3, Dated February 24, 2020.
23
BRPD Circular No-17, Dated September 28, 2020.
24
Net interest margin is a measure of the difference between the interest income generated and the amount of
interest paid out to the lenders, relative to the amount of interest earning assets.

40 Financial Stability Report 2020

 CHART 2.42: NET INTEREST MARGIN BY BANK GROUPS The SOCBs experienced negative NIM in
4.0% 3.7% 3.6%
CY20 after having a positive NIM in CY19
3.5% whereas SDBs’ NIM was negative for two
3.0% 2.8% 2.8%
2.8% consecutive years. The NIM of PCBs declined
2.5% 2.2% 2.1% to 1.9 percent which was 2.8 percent in
Net Interest Margin (%)

2.0% 1.9%
CY19. The NIM of FCBs also decreased for
1.5%
1.4%
the second consecutive years and stood at
1.0%
0.4%
0.6% 2.8 percent in CY20 (Chart 2.42). It is worth
0.5% 0.1% mentioning that the interest income for
-0.2%

-0.4% -0.3%
0.0%
FCBs was much higher compared to their
-0.5%
SOCBs SDBs PCBs FCBs Aggregate interest expense, whereas the interest
-1.0%
2018 2019 2020 income from loans barely exceeded interest
Source: DOS, BB, Compilation: FSD, BB. expense on deposits for the SOCBs and
SDBs. In aggregate, the industry’s NIM stood
at 1.4 percent in CY20 as compared to 2.1
percent in CY19.

CHART 2.43: NON-INTEREST EXPENSE TO GROSS

OPERATING INCOME RATIO
The ratio of non-interest operating expense
57.0% 56.5%
to gross operating income25 registered an
56.0%
increase of 2.7 percentage points from 53.8
percent in CY19 to 56.5 percent in CY20
55.0%
53.8% (Chart 2.43). Although the growth in
54.0%
52.9% operating income decreased to 2.4 percent,
53.0%
non-interest expenses grew by 2.3 percent
52.0%
in review year.
51.0%
CY2018 CY2019 CY2020

Source: DOS, BB; Compilation: FSD, BB.

CHART 2.44: BANKING SECTOR INCOME BY SOURCES The ratio of net interest income to total
3.0% assets decreased by 70 basis points in CY20
2.0%
1.9% 1.9%
1.9% 1.8% 2.0%
as compared to CY19. However, the ratio of
non-interest income to total assets
Ratio (%)

1.2%
1.0%
increased by 20 basis points from 1.8
0.0%
percent in CY19 to 2.0 percent in CY20
2018
2019 (Chart 2.44).
2020
Net interest income to total assets Non-interest income to total assets

Source: DOS, BB, Compilation: FSD, BB.

25
Gross Operating Income=Net Interest Income + Non-interest Income.

Financial Stability Report 2020 41

The interest rate spread narrowed by 90 basis points at end-December 2020 compared to
that of end-December 2019.
The weighted average lending rate decreased from 9.7 percent in December 2019 to 7.6
percent in December 2020 while the weighted average deposit rate recorded a decrease from
5.7 percent to 4.5 percent during this period26. As a result, the weighted average interest rate
spread for the banks narrowed from 4.0 percent in December 2019 to 3.1 percent in Decem-
ber 2020 (Chart 2.45).
CHART
T 2.45: BANKING SECTOR MONTHLY WEIGHTED CHART 2.46: BANK CATEGORY-WISE MONTHLY
AVERAGE OVERALL INTEREST RATE SPREAD WEIGHTED AVERAGE INTEREST RATE SPREAD FOR CY20
4.5 8.00
4.3 7.43 7.39
7.00
4.1 6.59
6.00 6.15 6.08 6.0
3.9 5.9
5.37 5.39 5.30 5.29 5.37

In Percent
3.7 5.00
In Percent

3.5
4.00
3.3
3.1 3.00

2.9 2.00
2.7
1.00
2.5

SOCBs SDBs FCBs PCBs Overall 2020

Overall 2020 Overall 2019 Overall 2018

Source: Statistics Department, BB.

Chart 2.46 illustrates interest rate spreads for different categories of banks. As the Chart
shows, the weighted average interest rate spread of the banking sector was hovering around
3.0 percent since the onset of COVID pandemic in Bangladesh. Spreads of SOCBs and SDBs
were well below 3.0 percent while the spread of PCBs remained around 3.0 percent. The
spread of FCBs continued to remain higher than other bank clusters as they were extending
consumer finance and credit card operation with higher interest rate.

2.8 CAPITAL ADEQUACY

Although Tier-1 capital ratio27 of the banking industry decreased slightly, capital to
risk-weighted assets ratio (CRAR) remained unchanged at end-December 2020 like the
previous period, yet remained well above the regulatory requirement. Improved capital
position of PCBs and FCBs helped to keep overall CRAR of the industry steady during this
period. Specially, increased income from government securities along with very small change
in required specific provision due to temporary relaxation in loan classification policy resulted
in higher net income which, in turn, increased capital base of PCBs and FCBs despite the
decrease in interest income from loans. However, during this period, capital position of the
SOCBs and SDBs deteriorated further and stayed below the minimum regulatory standard.
CRAR of the banking industry remained steady at 11.6 percent at end-December 2020
likewise to that of the previous period. Nevertheless, it was above the regulatory minimum
capital requirement of 10.0 percent in line with the Basel III capital framework. The additional
CRAR provides further resilience to banking sector to withstand the endogenous or

26
The spread is generally a combination of many factors, such as, the level of competition in the banking sector,
the amount of stressed loan, the managerial efficiency of financial intermediation process, and so on. Spread
can fluctuate over time because of the overall level of interest-rate risk in the sector and movements in market
interest rates.
27
Refers to Tier-1 capital to risk-weighted assets ratio.

42 Financial Stability Report 2020

exogenous shocks. At end-December 2020, the number of CRAR-compliant banks increased
to 49 from 48 of end-December 2019 as the CRAR of Probashi Kallyan Bank28 entered into this
list in the review period. Currently, 49 banks maintaining a CRAR of 10.0 percent or higher as
of end-December 2020 constitute 72.4 percent share of total assets of the banking system
(Chart 2.47). The asset share of the CRAR-compliant banks was slightly higher at 73.0 percent
at end-December, 2019 (Chart 2.48). It depicts that the growth of total assets, and deposits of
CRAR-non-compliant banks increased at a higher rate than those of the CRAR-compliant
banking groups in CY20.
CHART 2.47: ASSET SHARE OF BANKS BY CRAR AT CHART 2.48: YEAR-WISE CRAR, CRAR COMPLIANT BANKS
END-DEC 2020 AND THEIR ASSET SHARE
45% 40.3% 100% 51
40% 81.9%
35% 76.5% 73.2% 73.0%
80% 72.4% 50
27.6% 26.0%
30%
Asset share

25% 60% 49
20%
15% 40% 48
10% 6.1%
5% 20% 10.8% 10.8% 10.5% 11.6% 11.6% 47
0%
10 20 16 13 0% 46
<10% >=10% to >15% to <=20% 20% + Dec-16 Dec-17 Dec-18 Dec-19 Dec-20
<=15%
Banking Sector CRAR(LHS)
Number of Banks Asset Share of CRAR Compliant banks
CRAR No. of CRAR compliant banks(RHS)

Source: DOS, BB; computation: FSD, BB.

CHART 2.49: YEAR-WISE TIER-1 CAPITAL RATIO OF BANKS

Though the CRAR remain the same, the Tier-1
capital ratio, the core component of CRAR, of the
9.0% 60
8.0% 7.9%
7.6% 7.7% banking sector declined marginally at
7.4%
7.0% 6.8% 55
end-December 2020 as the net income of the
6.0%
5.0%
50 banking sector declined compared to previous
4.0%
45 year. Though decreased to 7.4 percent from 7.7
3.0%
2.0% 40
percent at end-December 2019, still the Tier-1
1.0% capital ratio was well above the regulatory
0.0% 35
Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 minimum requirement of 6.0 percent as
Tier-1 Capital Ratio (LHS)
recommended by Basel Committee on Banking
No. of Tier-1 capital compliant banks (RHS) Supervision (BCBS). The number of Tier-1 capital
compliant banks increased to 48 compared to 47
Source: DOS, BB; computation: FSD, BB.
at the preceding period.

CHART 2.50: CRAR BY BANKING GROUP AT END-DEC 2019 AND 2020 Chart 2.50 presents a comparative
analysis of CRAR of different banking
28.2%

40% groups. CRARs of SOCBs decreased by

24.5%

30% 70 basis points (bps) and that of PCBs

14.0%
13.6%

20% increased by 40 bps from end-Decem-

5.0%
4.3%

10% ber 2019 and reached to 4.3 percent and

0% 14.0 percent respectively at end-Decem-
SOCBs PCBs FCBs SDBs
-10% ber 2020. Besides, the CRAR of FCBs
-20% increased considerably while the CRAR
-30% of SDBs deteriorated further and
-40% remained in negative territory. It is
-32.0%
-32.9%

2019 2020
evident that the improved capital base
Source: DOS, BB; computation: FSD, BB.
of the PCBs and FCBs helped to sustain a
healthy CRAR for the banking industry.
28
Probashi Kallyan Bank has been scheduled as a specialized bank vide BB circular letter no. 16 dated July 30, 2018.

Financial Stability Report 2020 43

In line with the Basel III framework29, banks are required to maintain a Capital Conservation
Buffer (CCB) of 2.5 percent against the total risk-weighted assets in the form of common
equity tier-1 (CET-1) capital above the regulatory MCR of 10.0 percent. Against this regulatory
requirement, the banking industry maintained a CCB of 1.4 percent as of end-December 2020
(Chart 2.51). It was 1.6 percent at end-December 2019. Cluster-wise, SOCBs and SBs drew
down the industry’s CCB in the current period. However, during the review period, 40 out of
59 banks maintained the minimum required CCB while at end-December 2019, the number
was 38 out of 58 banks.

CHART 2.51: CCB BY BANKING GROUP AT END-DEC 2019 AND 2020

Chart 2.51 shows that PCBs and FCBs
18.2% maintained CCB above the minimum
20.0% requirement as of end-December 2020.
17.5% CCBs of both PCBs and FCBs increased at
14.5%
15.0% end-December 2020 and reached at 3.2
12.5% percent and 18.2 percent respectively.
10.0% However, SOCBs and SDBs could not
7.5% maintain CCB as they could not even
3.2%

5.0% 3.1% meet MCR of 10.0 percent as cluster.

1.4%

1.6%
0.0%

0.0%

2.5%
0.0% 0.0%
0.0%
SOCBs PCBs FCBs SDBs Total
Dec-19 Dec-20

Source: DOS, BB; computation: FSD, BB.

Taking the cross-country scenario into account (Table 2.5), the capital adequacy of
Bangladesh’s banking sector remained low compared to the ratios of neighboring countries
as of end-December 2020.
TABLE 2.5: COMPARISON OF CAPITAL ADEQUACY OF THE NEIGHBORING COUNTRIES
Countries CRAR (%)
2016 2017 2018 2019 2020
India 13.3* 13.9* 13.7* 15.1* 15.8*
Pakistan 16.2 15.8 16.2 17.0 18.6
Sri Lanka 15.6 15.2 15.1 16.5 16.5
Bangladesh 10.8 10.8 10.5 11.6 11.6
* Data as of end-September
Source: Financial Stability Report (various issues), Reserve Bank of India; Quarterly Compendium: Statistics of the
Banking System, December 2020, State Bank of Pakistan; Soundness Indicators – Quarterly Financial Information,
Central Bank of Sri Lanka; and DOS, BB.

2.9 LEVERAGE RATIO

Although all the banking groups experienced downward trend in leverage ratios30,
banking sector, as a whole, maintained a leverage ratio well above the regulatory
minimum requirement led mainly by high leverage ratios of PCBs and FCBs. This indicates
a better resilience of the banking sector to withstand probable systemic risks in future.
However, weaker capital base of SOCBs remains a concern from financial stability’s
perspective.

29
CCB requirement for banks in Bangladesh started from early 2016 in a phased-in manner and full implementation
commenced in early 2019 with CCB requirement of 2.5 percent above the regulatory MCR of 10.0 percent.
30
Leverage ratio = (Tier-1 capital after related deductions)/ (Total exposure after related deductions).

44 Financial Stability Report 2020

In order to restrict the build-up of excessive on- and off-balance sheet leverage in the banking
system, the Basel III framework introduced a simple, transparent, non-risk based leverage ratio
to act as a credible supplementary measure to the risk-based capital framework. Banking
sector maintained a leverage ratio of 4.2 percent at end-December 2020 against the
regulatory minimum requirement of 3.0 percent, which is 0.4 percentage point lower than 4.6
percent maintained at end-December 2019 (Chart 2.52). Most importantly, all the banking
groups experienced declines in leverage ratios with respect to those of end-December 2019.
FCBs maintained the highest leverage ratio of 12.7 percent followed by PCBs of 5.5 percent in
the review year. SOCBs’ leverage ratio was on the downward trend which stood at 0.6 percent
compared to 1.2 percent recorded at end-December 2019; the ratio remained well below the
minimum requirement at the end of the review period. Since SOCBs account for substantial
banking sector exposures, their weaker leverage ratio raises concern for financial stability.
Pertinently, the number of non-compliant banks in terms of leverage ratio remained identical
in the review period (Chart 2.53).

CHART 2.52: YEAR-WISE LEVERAGE RATIO OF BANKS CHART 2.53: YEAR-WISE DISTRIBUTION OF BANKS’
LEVERAGE RATIO
13.1%
12.7%

40
15.0% 35 35
35
5.7%
5.5%

4.6%

10.0%
4.2%
1.2%

30
0.6%

5.0%
Number of banks

0.0% 25
SOCBs PCBs FCBs SDBs Industry 20
-5.0%
-10.0% 15
9 9 9 10
-15.0% 10
5 5
-20.0% 5
-25.0% 0
-23.9%
-24.4%

<3% >=3% to <10% >=10% to 20% >20%

Dec-19 Dec-20 Dec-19 Dec-20

Source: DOS, BB; calculation: FSD, BB.

2.10 INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP)

Bangladesh Bank (BB) is working for implementation of Internal Capital Adequacy
Assessment Process (ICAAP)31 along with the commercial banks as a step towards
implementation of Pillar 2 of Basel III. BB advised the banks with a process document in 2014
to help evaluating their respective internal processes and strategies to ensure capital
adequacy for covering all material risks. All schedule banks are instructed to prepare ICAAP
reports annually and submit the same to BB along with supplementary documents while BB
reviews and evaluates banks’ ICAAP and associated strategies. Under ICAAP, banks need to
calculate capital charges against various risks under Pillar II, e.g. residual risk, concentration
risk, liquidity risk, reputation risk, strategic risk, settlement risk, appraisal of core risk
management, environmental and climate change risk and other material risks. If a bank fails
to produce their own ICAAP backed by proper evidence and rigorous review of their internal
risk management process, BB applies prudence to meet up their pillar 2 requirement. BB also
uses the information and observations found during SREP inspection conducted by the
inspection departments of BB. Based on the ICAAP reports and SREP inspection as of
December 2018; a series of bilateral meeting took place with 12 banks in between March 05,
2020 and March 19, 2020. Meetings with other 45 banks could not take place due to COVID-19
pandemic.

31
ICAAP includes regulations of a bank’s own supervisory review of its capital positions aiming to reveal whether
it has prudent risk management and sufficient capital to cover its overall risk profile.

Financial Stability Report 2020 45

As per last ICAAP observation (base year 2018), 13 out of 57 banks were undercapitalized in
terms of total capital requirement calculated under pillar I and pillar II of the Basel III accord.
Moreover, with the experience of the last three years’ meetings (base year of 2016, 2017 and
2018 respectively) with banks, it was found that the estimated additional capital requirement
for residual risk was arisen mainly due to documentation error which constituted the highest
among the pillar II risks. Apart from that, strategic risks and appraisal of core risks
management were the other foremost concerns for the banks.

2.11 BANKING SECTOR LIQUIDITY

The liquidity situation in the banking industry appeared to be easing during CY20.
The banking sector’s liquidity demonstrated an upward trend in CY20 compared to the
preceding year as evident from the movement in the advance-to-deposit ratio (ADR) and call
money borrowing rate. The ADR of the banking industry in aggregate decreased to 72.7 percent
at end-December 2020 from 77.3 percent at end-December 2019 as the growth of deposits
(excluding interbank deposits) outpaced the growth of loans and advances during the review
year. Though up to May 2020, the ratio demonstrated an upward trend but after that it started
declining and remained well below the allowable limit32 set by BB till December 2020.
CHART 2.54 : MONTHLY ADR AND CALL MONEY BORROWING RATE
77.8%

78.0%

78.0%

5.1%
6.00% 5.1%

5.0%
5.0%
79.00%

4.9%
77.2%

4.8%

4.7%
76.9%

78.00%

4.2%
76.2%

5.00%
75.4%

77.00%
4.00%
74.5%

76.00%

2.9%
74.0%

2.6%
75.00% 3.00%

2.0%
73.0%

1.8%
72.7%

72.7%

74.00%
2.00%
73.00%
72.00% 1.00%
71.00%
0.00%
70.00%

ADR (%) Call Money Rate

Source: DOS, BB.

As Chart 2.54 depicts, call money rate in the banking sector hovered within 4.0 percent to 5.0
percent till August 2020 and declined below 3.0 percent thereafter till the end of the year. In
CY19, the rate ranged within 4.0 to 5.0 percent and remained in this band throughout the year.
However, in CY20, as the liquidity started to increase primarily due to the reduction in CRR and
high inflow of remittances, the call money rate started to fall and hit the lowest among last
three years.
CHART 2.55: BANKS’ CLUSTER-WISE ADR CHART 2.56: DISTRIBUTION OF BANKS IN TERMS OF ADR
90.0% 83.8% 79.8% 37
76.3% 76.1% 77.3%
80.0% 72.7%
63.3%
Number of Banks

70.0% 61.9% 26
56.6% 54.0%
60.0%
50.0% 18
40.0%
10
30.0% 6 7 6
20.0% 3 2 1
10.0%
0.0%
Up to 70% 70%- 85% 85%-90% 90%-100% >100%
SOCBs PCBs FCBs SDBs Total
2019 2020 2019 2020

Source: DOS, BB.

32
Banks were instructed in April 2020 to rationalize their ADR within maximum 87.0 percent for conventional banks
and 92.0 percent for Islamic Shari’ah based banks respectively (ref.: DOS Circular no.02 dated 12 April 2020).

46 Financial Stability Report 2020

Chart 2.55 exhibits that ADRs of all bank clusters decreased notably except the SDBs, ADR of
which remained mostly unchanged. Among the clusters, PCBs maintained the highest ADR as
usual. However, their ADR decreased by 4.0 percentage points in CY20 compared to that of
the preceding year. In case of SOCBs and FCBs, such decline accounted for 5.3 and 9.3
percentage points respectively as the deposits growth in those cluster was much more
prominent than the rests. Despite the plummet in overall ADR, the number of banks
maintaining ADR more than 90.0 percent and above has increased to 7 (seven) in CY20 from 5
(five) in CY19 (chart 2.56).
Besides, all banking clusters as well as the industry as a whole maintained liquidity coverage
ratio (LCR33) and net stable funding ratio (NSFR34) above the regulatory minimum
requirement35 throughout the CY20 (Chart 2.57 and 2.58). The industry average of LCR
increased from 200.5 percent at end-December 2019 to 224.8 percent at end-December 2020
indicating sufficient liquidity in meeting up the short-term obligations for next 30 calendar
days under hypothetical financial stress scenario. Among different clusters, SOCBs maintained
the LCR of 360.0 percent on average throughout the CY20. On the other hand, the NSFR of the
banking industry has slightly decreased from 111.2 percent at end-December 2019 to 110.1
percent at end-December 2020.

CHART 2.57: BANKS’ CLUSTER-WISE MONTHLY LCR CHART 2.58: BANKS’ CLUSTER-WISE QUARTERLY NSFR
450.0% 120.00%
400.0%
350.0% 115.00%
300.0%
250.0% 110.00%
200.0%
105.00%
150.0%
100.0% 100.00%
50.0%
0.0% 95.00%

90.00%
March June September December
SOCBs PCBs Conventional PCBs Islamic FCBs Industry Group: SOCBs Group: PCBs Conventional Group: PCBs Islamic Industry

Source: DOS, BB.

In addition, both conventional and Islamic Shari’ah based banks were able to maintain the
minimum Cash Reserve Ratio (CRR) as of end-December 2020. Both types of banks were also
compliant in fulfilling the Statutory Liquidity Ratio (SLR) of 13.0 percent and 5.5 percent
respectively.

2.12 PERFORMANCE OF BRANCHES OF LOCAL BANKS OPERATING ABROAD

Among the Bangladeshi banks, two SOCBs and one PCB have extended their international
banking services through operating 7 full-fledged overseas branches in different locations
of the UAE and India. The operating performance as well as asset and liability situation of
these branches deteriorated due to the ongoing pandemic. Apart from overseas branch
banking, 22 Bangladeshi banks are providing foreign remittances, and trade and
investment related services through exchange houses, representative offices and
subsidiary companies abroad.
The cumulative net profit of the overseas branches in CY20 was USD 9.2 million which was
USD 4.3 million lower than the previous year. The ongoing pandemic situation, since the
beginning of 2020, has heavily affected the international trade and migrant employment
33
LCR measures a bank’s need for liquid assets in a stressed environment over the next 30 calendar days.
34
NSFR measures a bank’s need for liquid assets in a stressed environment over one year period.
35
Minimum requirement: 100 percent for LCR; greater than 100 percent for NSFR.

Financial Stability Report 2020 47

scenario which seemed to lead this downward performance of the overseas branches in CY20.
In this review year, the customer deposit by overseas branches declined by 17.7 percent and
stood to USD 223.3 million from USD 271.1 million of the previous year. Besides, loans and
advances in CY20 stood at USD 82.6 million which was USD 1.1 million lower than the
previous year.

2.12.1 ASSETS STRUCTURE OF OVERSEAS BRANCHES

Bangladeshi bank branches operating overseas observed a moderate decrease in total
assets in CY20 than that of the previous year.
The accumulated asset of the overseas branches in CY20 was USD 338.3 million36 or BDT 28.7
billion, which accounted for 0.2 percent of the total asset of the banking industry of
Bangladesh. In CY20, the total asset of these overseas branches was 1.7 percent lower than
the previous year. A slight reduction of 7.4 percent and 5.5 percent respectively in cash and
balance from respective foreign central banks, and balance with other banks and FIs along
with a notable escalation of USD 10.6 million in property, equipment and other assets have
been observed in CY20.
CHART 2.59: CHANGE IN ASSET COMPOSITION OF BANK BRANCHES OPERATING IN ABROAD
100% 4.87% 3.39% 3.96% 450

394.50
7.17%
11.71% 400
28.53% 24.29%
80% 24.40% 350
300
In USD million

60%
In percent (%)

250
60.95%
145.50

142.53
41.39%

134.76
39.83%

123.35
200
47.72%
104.55

40%
96.76

83.66
150

82.56
75.80
73.76
52.64

100

31.50

24.26
13.64
20%

8.76
30.36% 28.60% 50
22.48% 20.36%
0
0%
CY 17 CY 18 CY 19 CY 20

Bal. from Central Banks Bal. with other banks & Fis
Loan & Advances Fixed & other assets CY 2017 CY 2018 CY 2019 CY 2020

Source: Scheduled Banks, Compilation: FSD, BB.

2. 12.2 LIABILITIES STRUCTURE OF OVERSEAS BRANCHES

Total liabilities of the overseas branches decreased slightly in CY20 in comparison with CY19.

CHART 2.60: LIABILITIES COMPOSITION OF BANKS IN Total liability of the overseas branches of
OPERATING IN ABROAD Bangladeshi banks was USD 283.7 million in
92.6%
CY20 which was USD 9.2 million lower than
100.0%
72.1% 75.7% 78.7% the previous year. Customers’ deposits,
which consists of 78.7 percent of total
80.0%
In percent (%)

60.0%
27.9%
liability in the review year was slashed by
40.0% 24.3%

7.4%
21.3%
17.6 percent equivalent to USD 47.7 million.
20.0%

0.0%
However, the aggregated dues to head
CY 2017 CY 2018 CY 2019 CY 2020 offices, branches abroad and other liabilities
Customer Deposits Dues to HO, branches abroad & other liabilities
of these branches were almost tripled in the
review year and stood at USD 60.4 million.
Source: Scheduled banks, Compilation: FSD, BB.

36
Balances denominated in foreign currencies is translated into USD and recorded at the exchange rate as on 30
December 2020 from the January 2021 issue of Monthly Economic Trend, Bangladesh Bank.

48 Financial Stability Report 2020

2.12.3 PROFITABILITY OF OVERSEAS BRANCHES
The aggregate net profit of the overseas branches decreased in CY20 compared to CY19.
The aggregated net profit from the overseas branches during the review year is USD 4.3
million which is 53 percent lower than that of the previous calendar year. This significant
reduction in net profit has led to decline the ROA of this banking segment during the review
period. The ROA was 1.3 percent in CY20, which was 2.7 percent in CY19. The overseas branch
operation in the UAE constitutes almost 83 percent of the total overseas profit.

2.12.4 RISKS FROM OVERSEAS BANKING OPERATION

Despite the moderate performance of the overseas branches, continuous monitoring is
required to ensure that these branches are properly complying with the regulations
imposed by the regulatory authority of both home and host countries.
Operation of overseas bank branches is generally exposed to various risks including
non-compliance to laws and regulations of host countries and changing macro-financial
conditions of those countries. Any materialization of such risks can put significant stress on
overseas branches’ financial positions and may affect the parent banks’ financial states.
However, as of December 2020, the overall banking and financial activities of the overseas
branches were not sizeable enough to create any systemic risks on the accounts of their
parent banks in Bangladesh.

2.13 ISLAMIC BANKING

Islamic banking in Bangladesh has been attaining marked growth and strong market demand
over the period. The Shari’ah-based banking system is receiving growing attention with its
‘equity-based and interest-free’ banking philosophy. Besides, this segment of banking
industry has been able to increase its market share over time through innovation and product
diversification. Currently, a total of 8 (eight) full-fledged islamic banks with 1311 branches are
operating in the banking sector of Bangladesh (as of end-December, 2020). Besides, 9 (nine)
conventional banks operating 19 islamic banking branches and 14 conventional banks
operating 198 islamic banking windows are providing islamic banking services.
Chart 2.61 shows the snapshot of overall CHART 2.61: PERFORMANCE MAP OF ISLAMIC BANKING
performance of islamic Banks in terms of END-DECEMBER 2020
capital adequacy, asset quality, efficiency, Capital_Adequacy
liquidity and growth indicators of last two
years. Compared to CY19, the performance
of islamic Banks in CY20 improved in terms Growth Asset_Quality
of asset quality and liquidity indicators.
Growth in total assets especially in
investments and increased surplus
provision contributed to decreasing gross
non-performing investments (i.e., NPL in Liquidity Efficiency

common term) and net NPL ratio

2019 2020
respectively; thereby improving the asset
quality indicator of this sector. Liquidity Note 1: Indicators value lying away from the center refer to
higher risk.
situation improved as stock of high quality Note 2: Excluding islamic banking branches/windows of
liquid assets in terms of total net cash conventional banks.
outflows over the next 30 calendar days Source: DOS, BB; computation: FSD, BB.

Financial Stability Report 2020 49

increased while the advance-to-deposit (ADR) ratio decreased. Nonetheless, reduction in
investment income and non-investment income caused ROA to fall which drove down the
efficiency parameter compared to CY1937.
Though CRAR showed an upward trend in CY20, decline in leverage ratio kept the capital
adequacy indicator almost in the same position of the map as observed in CY19. On the other
hand, slow growth in capital or shareholders' equity compared to investments, deposits, and
total led the growth indicator to remain almost in same point found in FY19.

2.13.1 GROWTH OF ISLAMIC BANKING

Except in profit, islamic banks experienced a steady growth in terms of assets, liabilities,
deposits, investments (loans and advances)38, and shareholders’ equity in CY20 compared
to the previous year.
Islamic banking growth parameters are presented in terms of total investments (loans and
advances), deposit, liabilities, assets, net profit, and shareholders’ equity as illustrated in
Charts 2.62 and 2.63.
CHART 2.62: TRENDS OF ISLAMIC BANKING CHART 2.63: TRENDS OF ISLAMIC BANKING NET
INVESTMENT, DEPOSITS, LIABILITIES, AND ASSETS PROFIT AND EQUITY
4,000 200
167.9
3,500 175 158.9
Amounts in Billion BDT

138.5 144.8
3,000 150 134.5
Amounts in Billion BDT

2,500 125
2,000 100
1,500 75
1,000
50
18.2

18.2
17.6

17.1
15.5
500
25
-
0
2016 2017 2018 2019 2020
2016 2017 2018 2019 2020
Total Investments Total Deposits Total Liabilities Total Assets Net Profit After Tax Total Shareholders Equity
Note: Excluding Islamic banking branches/windows of conventional banks.
Source: DOS, BB; computation: FSD, BB.

In CY20, islamic banks’ investments (loans and advances) grew by 12.5 percent (12.3 percent
in CY19), deposit increased by 16.8 percent (15.9 percent in CY19), liabilities grew by 16.8
percent (14.8 percent in CY19), shareholders’ equity increased by 5.7 percent (10.1 percent in
CY19) and the overall assets increased by 16.3 percent (14.5 percent in CY 19). However, net
profit decreased by 6.0 percent in CY20. Compared to the overall banking industry, higher
growth was observed in islamic banks in terms of investments, deposits and total assets.

2.13.2 MARKET SHARE OF ISLAMIC BANKS

As of end-December 2020, more than one-fifth of the banking sector assets were held by
eight islamic banks. Out of 8(eight) islamic banks, top 4(four) banks jointly held 14.7
percent of total assets of the banking sector.
Chart 2.64 shows the aggregate market share of islamic banks in terms of total investments,
deposits, liabilities, equity, and total assets.
The aggregate market share of islamic banks in CY20 (excluding Islamic banking
branches/windows of conventional banks) has been increased compared to those in CY19. At

37
Plausible reasons for reduction in investment and non-investment incomes are explained in section 2.13.5 in details.
38
According to Islamic Shari’ah based banking loans and advances are termed as investment.

50 Financial Stability Report 2020

end-December 2020, islamic banks possessed 20.2 percent (19.6 percent in CY19) of total
assets, 21.3 percent (20.6 percent in CY19) of total deposits and 20.5 percent (19.8 percent in
CY19) of total liabilities of the overall banking system. Share of investments (loans and
advances) was 24.0 percent, experiencing a slight increase compared to CY19 while the share
of equity marginally declined from 15.6 percent in CY19 to15.4 percent in CY20.
CHART 2.64: MARKET SHARE OF ISLAMIC BANKS
AND THE CONVENTIONAL BANKS IN CY20
84.6%
90% 76.0% 78.7% 79.5% 79.8%
80%
70%
60%
50%
40%
24.0% 21.3% 20.5% 20.2%
30% 15.4%
20%
10%
0%

Islami Banks Conventional banks

Source: DOS, BB; computation: FSD, BB.

2.13.3 CAPITAL POSITION OF ISLAMIC BANKS

Under the Basel-III risk-based capital adequacy framework of Bangladesh, the minimum
requirement of Capital to Risk-weighted Assets Ratio (CRAR) is 10 percent. At the end of
CY20, the aggregate CRAR of the islamic banks reached to 12.7 percent from 12.4 percent
in CY19.
CHART 2.66: DISTRIBUTION OF ISLAMIC BANKS IN
CHART 2.65: AGGREGATE CRAR OF ISLAMIC BANKS
MAINTAINING CRAR
14%
12.7% 8 7
12.4%
11.6% 7 6 6 6
12% 11.2%
Aggregate CRAR

10.9% 6
5
In Number

10% 4
4 3
3
8%
2 1 1 1 1 1 1 1 1
1 0
6%
2016 2017 2018 2019 2020 0
2016 2017 2018 2019 2020
Islamic Banks Industry
< 10% 10% to 12.5% > 12.5%
Requred CRAR Req. CRAR+ Req. CCB

Note: Excluding Islamic banking branches/windows of conventional banks.

Source: DOS, BB; computation: FSD, BB.

Chart 2.65 presents the historical trend of aggregate CRAR of islamic banks along with the
banking industry from CY16 to CY20. The aggregate ratio has been gradually improving and
showing an upward trend.
Chart 2.66 shows the number of banks maintained the CRAR in different ranges. In CY20,
1(one) out of 8(eight) islamic banks maintained CRAR between 10 to 12.5 percent while 6(six)
banks had more than 12.5 percent, enabling them to maintain 10 percent MCR and 2.5
percent CCB together. However, the CRAR of only 1(one) Islamic bank remained below the
MCR of 10.0 percent since long and currently operating under a reconstruction scheme.

Financial Stability Report 2020 51

 CHART 2.67: AGGREGATE LEVERAGE RATIO OF CHART 2.68: DISTRIBUTION OF ISLAMIC BANKS IN
ISLAMIC BANKS MAINTAINING LEVERAGE RATIO
6%
5.18% 7
6

4.70%
4.93%

4.51%
6

4.39%
4.57%
4.62%

4.24%
4.16%
5%

4.13%
5
4 4 4 4
4% 4
3 3 3 3
3
3%
2
1 1 1 1 1 1
2%
1
1% 0
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020

Islamic Banks Industry Required < 3% 3% to 5% > 5%

Note: Excluding Islamic banking branches/windows of conventional banks.

Source: DOS, BB; computation: FSD, BB.

Chart 2.67 presents trend of the aggregate leverage ratio of islamic banks39. The leverage ratio
of islamic banks declined marginally to 4.2 percent in CY20 from 4.4 percent in CY19, but it
remained over the minimum requirement of 3.0 percent. However, the number of islamic banks
maintaining the leverage ratio at or above the required level remained the same as in the last
three years (Chart 2.68).
2.13.4 ASSET QUALITY OF ISLAMIC BANKS
Islamic banks showed a better performance compared to the conventional banks in terms of
both classified investments to total investments ratio and net classified investments to total
investment ratio in CY20. However, the unclassified rescheduled investment to total
investments ratio increased slightly in CY20 from the previous year.
Chart 2.69 demonstrates comparison on gross classified investments (GNPL), net classified Loans/
investments (NNPL) and unclassified rescheduled loans/investments (URSDL) from CY19 to CY20
within islamic banks and between islamic banks and banking industry. All the three indicators,
GNPL ratio, NNPL ratio, and URSDL ratio showed better performance of islamic banks as they
remained below the industry level in both periods. The GNPL and NNPL ratios of Islamic banks
declined in CY20 from the previous period while the URSDL ratio increased during the same period.
CHART 2.69: CLASSIFIED INVESTMENT, NET CLASSIFIED CHART 2.70: DISTRIBUTION OF ISLAMIC BANKS BY GNPL
INVESTMENT AND RESCHEDULED LOAN (CY19 & CY20) NNPL AND URSDL RATIO (CY19 & CY20)
14.1% 8 7 7
15.0%
13.0% 7 6
11.20%
10.0% 6 5
11.0% 9.3% 9.3%
8.1% 5
9.0% 4
7.0% 4 3 3
4.7% 4.1%
5.0% 3 2 2 2 2
1.0%

-1.2%
-0.4%

-1.4%

3.0% 2 1 1 1 1 1
1.0% 1 0 0
-1.0% 0
Islamic Banks Banking Islamic Banks Banking
-3.0% GNPL NNPL URSDL GNPL NNPL URSDL
Industry Industry
Ratio Ratio Ratio Ratio Ratio Ratio
2019 2020 2019 2020
GNPL Ratio NNPL Ratio URSDL Ratio <5% >5%to<8% >8%

Note: Excluding Islamic banking branches/windows of conventional banks.

Source: DOS, BB; computation: FSD, BB.

39
The leverage ratio is as important as CRAR since CRAR is a risk-weighted measure and leverage ratio is a
non-risk-weighted measure. The leverage ratio is introduced in Basel III to reduce the built up of excessive
leverage which was an underlying cause of great financial crisis. The overall leverage ratio used here to indicate
whether the excessive leverage is being built up by Islamic Banks compared to banking industry. The
distribution of the ratio is used to show whether the distribution is symmetrical or positive or negatively skewed.

52 Financial Stability Report 2020

Chart 2.70 shows the distribution of GNPL ratio, NNPL ratio and URSDL ratio of Islamic banks
in the last two years. It shows that in CY20, 6(six) out of 8(eight) banks had GNPL ratio below
5.0 percent, rest 2(two) banks had GNPL ratio of more than 5.0 percent. In CY19, the number
was five in less than 5 percent category and three in more than 5 percent category. For NNPL
ratio, seven banks were able to maintain the NNPL ratio below 5.0 percent in both years. In
CY19, four banks had their URSDL ratio more than 5.0 percent while in CY20, the number has
increased to five.

2.13.5 PROFITABILITY OF ISLAMIC BANKS

Though the return on assets (ROA) and return on equity (ROE) of islamic banks were higher
than the industry average, both have declined in the review year compared to the previous
year as income from investments and non-interest income declined and interest and
non-interest expenses increased.
Alongside the overall banking sector’s profitability, the net income of islamic banking cluster
has also been affected by COVID-19 pandemic and decreased by 6.3 percent in CY20 while it
had an 17.3 percent increase in CY19. They could not mobilize normal credit recovery due to
regulatory relaxation in loan recovery during the COVID period, which might lower their profit
from reinvestment of otherwise recovered loan.
The chart 2.71 shows the comparative illustration of ROAs of Islamic banks and banking
industry of last five years. Though cyclical in nature, ROAs of islamic banks and banking
industry are gradually declining since 2016, which is a matter of concern. In 2019, the islamic
banks contributed 23.9 percent of total industry net income (profits). In 2020 such
contribution increased to 32.4 percent. However, the ROA of the islamic banks declined to 0.5
percent in 2020 from 0.6 percent in 2019.

CHART 2.71: ISLAMIC BANKING SECTOR RETURN ON ASSET (ROA) CHART 2.72: DISTRIBUTION OF ISLAMIC BANKS BY ROA
0.9% 0.8% 1.2%
0.7%
0.7%

0.8% 0.7% 1.1%

0.7% 1.0%
0.6% 0.6%
0.6%
0.5%

0.9%
0.5%
0.5%
0.8%
0.3%
0.3%

0.4%
0.7%
0.3%
0.6%
0.2%
0.5%
0.1%
0.4%
0.0%
2016 2017 2018 2019 2020 0.3%
Islamic Banks Banking Industry 2016 2017 2018 2019 2020

Note: Excluding Islamic banking branches/windows of conventional banks.

Source: DOS, BB; computation: FSD, BB.

Chart 2.72 demonstrates the distribution of bank-wise ROA of islamic banking cluster. Out of
8 (eight) islamic banks, 3 (three) banks were able to make modest increase in their ROA in the
review year while 4 (four) banks experienced a decline in this parameter and the rest one
failed to generate any profit in 2020.

Financial Stability Report 2020 53

CHART 2.73: ISLAMIC BANKING SECTOR RETURN ON EQUITY (ROE) CHART 2.74: DISTRIBUTION OF ISLAMIC BANKS BASED ON ROE
14.0% 13.1% 13.1% 18.0%

10.4%
11.4% 16.0%
12.0% 10.7%
9.7%
10.2%
14.0%
10.0%

7.4%
12.0%
8.0%

4.8%
10.0%

4.3%
6.0%
8.0%
4.0%
6.0%
2.0%
4.0%
0.0%
2.0%
2016 2017 2018 2019 2020
0.0%
Islamic Banks Banking Industry 2016 2017 2018 2019 2020

Note: Excluding Islamic banking branches/windows of conventional banks.

Source: DOS, BB; computation: FSD, BB.

Like ROA, the ROE of the islamic banking sector also declined in 2020 (Chart 2.73). In CY19, the
ROE of islamic banking sector was 11.4 percent whereas in CY20, such return declined by 120
basis points and reached to 10.2 percent. However, compared to ROE of the banking industry,
ROE of islamic banks remained relatively stable.
In the review year, ROE of only 3 (three) islamic banks have increased while 4 (four) banks
faced deterioration in this parameter. The rest one failed to generate any profit against their
equity (Chart 2.74).
Chart 2.75 shows the components of islami banks’ income which gives some insight on
declining ROA and ROE in the review year. From the chart, it has been observed that the
investment income to total assets and non-investment income to total assets both declined
compared to those of the previous year. Net investment (interest) income to total assets also
declined, highlighting narrower investment income spread compared to previous year. This
might be due to ceiling on investment income (interest income) given by Bangladesh Bank
from April, 202040.
On the other hand, non-investment income to total assets ratio of islamic banks was only 0.8
percent as compared with the industry average of 1.8 percent, representing a lower income
from off-balance sheet (OBS) transactions, services, and fee based incomes.
CHART 2.75: ISLAMIC BANKING SECTOR RETURN ON EQUITY (ROE)

7.5%
Investment Income ((interest) to Total Assets 7.6%
6.4%

2.7%
Net Investment (interest) income to total Assets 2.6%
2.1%
2018
0.9%
Non Investment (interest) income to Total Assets 0.9%
0.8% 2019

-0.8%
Net Non-Investment (Interest) income to Total Assets -0.9% 2020
-0.8%

1.3%
Provision & Taxes to Total Assets 1.2%
0.8%

Note: Excluding islamic banking branches/windows of conventional banks.

Source: DOS, BB; computation: FSD, BB.

40
Please refer to BRPD circular No. 03, dated February 24, 2020.

54 Financial Stability Report 2020

2.13.6 ISLAMIC BANKS’ LIQUIDITY
In CY20, islamic banks maintained adequate liquidity to meet up their regulatory
requirements of Cash Reserve Ratio (CRR) and Statutory Liquidity Requirement (SLR). They
also kept Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) in line with
Basel III standard. In addition, IDR (ADR) is also found within the regulatory limit.
As per the section 36(1) of Bangladesh Bank Order, 1972 (amended in 2003), every scheduled
bank has to maintain a certain portion of their demand and time liabilities with the
Bangladesh Bank. The rate is determined based on the objective of monetary policy pursued
by Bangladesh bank from time-to-time. To ensure sufficient liquidity in the money market
during the current pandemic, Bangladesh Bank has decreased the Cash Reserve Ratio (CRR) to
3.5 percent on daily basis and 4.0 percent on bi-weekly basis in 202041. In this review year,
islamic banks consistently maintained (on daily basis) CRR to 3.48 percent.
Islamic banks also maintained SLR, as a requirement of Section 33, sub-section 2 of Bank
Company Act 1991, amended in 2013, at 5.5 percent in the review year. It is mentionable that
islamic banks are allowed to maintain their statutory liquidity requirement (SLR)42 at a
concessional rate compared to that of the conventional banks, as Shari’ah-compliant SLR
eligible instruments are not widely available in the market.
In addition to maintaining CRR and SLR as regulatory requirements, banks have to maintain
two additional liquidity ratios known as Liquidity Coverage Ratio (LCR) and Net Stable
Funding Ratio (NSFR), recommended by Basel committee under the Basel III guideline to
ensure sufficient liquidity in meeting their short-term and long-term obligations respectively.
Under the LCR, bank has to maintain an adequate level of unencumbered, high-quality liquid
assets that can be converted into cash to meet its liquidity needs for 30 calendar days under
hypothetical financial stress scenario. The value of this ratio must be at least 100.0 percent,
meaning that the stock of high-quality assets maintained by bank must be at least as large as
the expected total net cash outflows over the 30-days stress period. On the other hand, The
NSFR aims to limit over-reliance on short-term wholesale funding during times of abundant
market liquidity and encourage better assessment of liquidity risk across all on- and
off-balance sheet items. The minimum acceptable value of this ratio is 100 percent, indicating
that available stable funding should be at least equal to required stable funding.
Chart 2.76 shows that islamic banks were able to maintain the minimum required level of LCR
throughout the reporting period. Islamic banks maintained LCR of 192.7 percent, a bit lower
than the industry average of 224.8 percent in 2020. However, LCR of islami banks at end-CY20
improved significantly compared to that of at end-CY19.

41
BB has re-fixed the CRR at 3.5 percent on daily basis and 4 Percent on bi-weekly average basis effective from 9th
April 2020 (MPD Circular No. 03, dated 9th April 2020).
42
Refer to MPD Circular No. 02, dated-10/12/2013, and MPD Circular No. 01, dated-23/06/2014.

Financial Stability Report 2020 55

 CHART 2.76: LCR MAINTAINED BY CONVENTIONAL CHART 2.77: ISLAMIC BANK-WISE LCR
BANKS AND ISLAMIC BANKS MAINTENANCE SCENARIO
250 225.6 224.8
213.5
430
200.5 204.0
192.5 194.5 192.7 380
200 174.0
167.0 330
In Percent

In Percent
150 280
230
100 180
130
50
80
30
0
Mar-20 Jun-20 Sep-20 Dec-20
Dec-19 Mar-20 Jun-20 Sep-20 Dec-20
Overall Banking Islamic Banks Required LCR Islamic Banks Required

Source: DOS, BB; computation: FSD, BB.

The Chart 2.77 shows the distribution of Islamic banks in terms of maintaining the LCR in last
four quarters. Out of eight Islamic banks, six banks maintained more than 100.0 percent of
LCR.
CHART 2.78: NSFR MAINTAINED BY CONVENTIONAL CHART 2.79: ISLAMIC BANK-WISE NSFR
BANKS AND ISLAMIC BANKS MAINTENANCE SCENARIO
120 155
115.8

116.3

113.0
113.0

112.0
111.2

111.2
110.6

110.1

115 145
109.8

110 135
In Percent

In Percent

105 125

100 115

95 105

90 95
Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-20 Jun-20 Sep-20 Dec-20

Overall Banking Islamic Banks Required NFSR Islamic Banking Sector Required
Source: DOS, BB; computation: FSD, BB.

In case of NSFR (Chart 2.78), islamic banks were able to maintain 113.0 percent, which is
higher than the industry average of 110.1 percent in the review year. However, compared to
NSFR at end-CY19, no notable change was found in NSFR at end-CY20.
Chat 2.77 demonstrates that number of islamic banks along with their trend in maintaining
NSFR. Out of 8 (eight) banks, only 1 (one) bank failed to maintain the ratio at required level. It
is also mentionable that 5 (five) banks were able to maintain the ratio above the average value
of islami banks cluster.
The aggregate Investment-Deposit Ratio (IDR) of islamic banks was 83.3 percent at end-CY20
against the permissible level of 92.0 percent. It was 89.31 percent at end-CY19.
Chart 2.80 demonstrates that the IDR of the islamic banks was 83.3 percent, which was higher
than that of the overall banking industry. It is mentionable that islamic banks are allowed to
accommodate more investment than conventional banks as they have the advantage to
maintain relatively lower amount of SLR.

56 Financial Stability Report 2020

 CHART 2.80: IDR (ADR) OF ISLAMIC BANKING CHART 2.81: DISTRIBUTION OF ADR (IDR)
AND THE OVERALL BANKING SECTOR OF ISLAMIC BANKS
100.0%

86.3%

91.5%

89.3%
87.8%

83.3%
75.9%
90.0%

77.6%

77.3%

77.3%
71.9%
100.0%
80.0%
80.0%
70.0%
IDR (ADR)

60.0% 60.0%
50.0%
40.0%
40.0%
20.0% 30.0%
20.0%
0.0%
2016 2017 2018 2019 2020 10.0%
0.0%
Islamic Banks Banking Sector 1 2 3 4 5 6 7 8
(Excluding Islamic branch & Windows of conventional banks) Banks
Source: DOS, BB; computation: FSD, BB. Industry Limit

Chart 2.81 shows the distribution of IDR (ADR) of islamic banks at end-CY20, which suggests
that no islamic bank has crossed the permissible level of IDR (ADR) in the review year.

2.13.7 REMITTANCE MOBILIZATION BY THE ISLAMIC BANKS

Islamic banks in Bangladesh collected and mobilized 32.4 percent of the total wage
earners’ remittances during CY20. However, such remittance collection is highly
concentrated as one islamic bank alone mobilized 24.6 percent of total inward remittances
received by whole banking sector and 75.9 percent of total inward remittances received by
all islamic banks.
Like conventional banks, islamic banks also play an important role in channeling foreign
remittance to the local beneficiaries across the country. In CY20, the total inward foreign
remittance was BDT 1,845.0 billion, of which BDT 597.5 billion was collected and distributed
by the islamic banks. During the period, the total remittances collected and distributed by
banking sectors increased to 19.4 percent. For islamic banks, such growth was 34.1 percent
(Chart 2.82).
CHART 2.82: SHARE OF REMITTANCES COLLECTED CHART 2.83: REMITTANCES COLLECTION BY
BY THE ISLAMIC BANKS INDIVIDUAL ISLAMIC BANK IN 2020
700 40% 80.0% 75.9%
32.4%
600 35% 70.0%
Share of remittance

60.0%
Contribution (in %)

35.4% 30%
500
28.8% 50.0%
BDT in billion

34.6% 33.5% 25%

400 40.0%
20%
597.5

30.0%
13.5%

300
15%
458.6

445.5

20.0%
6.1%
369.5

364.8

200
2.0%
1.2%
0.9%
0.5%
0.0%

10% 10.0%
100 5% 0.0%

0 0% 1 2 3 4 5 6 7 8
2016 2017 2018 2019 2020 Individual Islami Banks

Source: DOS, BB; computation: FSD, BB.

Chart 2.83 shows that out of 8 (eight) islamic banks, only one islamic bank collected and
mobilized 75.9 percent of total inward remittances received by all islamic banks together. The
3 (three) largest recipients of remittance were able to collect more than 95.0 percent together
and the remaining 5 (five) banks received less than 5.0 percent jointly (Chart 2.83).

Financial Stability Report 2020 57

2.14 PERFORMANCE OF NEW BANKS
As of end-December 2020, the market share of 12 new banks, with respect to total banking
industry assets, reached 4.9 percent. Loans and advances constituted 69.2 percent of
assets of these banks. The Gross NPL ratio decreased from 9.5 percent in CY19 to 7.8
percent during the review year.
A total of 12 new private banks entered into the banking system during 2013-20. Out of those,
one (01) is offering Shari’ah-based banking, another one (01) is providing specialized banking
services and the other ten (10) are providing conventional banking services. At
end-December 2020, the aggregate assets of these banks accounted for 4.9 percent of the
total banking industry assets while the same was 4.8 percent at end-December 2019. The
share of loans and advances of the new banks rose to 5.4 percent of the overall industry’s
loans and advances at end-December 2020 which was 5.1 percent at the end of the preceding
year. Loans and advances constituted the largest proportion of assets of these banks and the
proportion was comparatively higher than the banking industry as a whole. At end-December
2020, loans and advances constituted 69.2 percent of the total assets of these banks, which
was 71.7 percent at end-December 2019. This ratio was 63.8 percent for the overall banking
industry in 2020.
The quality of assets of these banks at end-December 2020 appeared to be better as their
gross NPL ratio was lower (7.8 percent) compared to the industry NPL ratio of 8.1 percent. The
gross NPL ratios of these banks and the banking industry as a whole were 9.5 percent and 9.3
percent respectively at end-December 2019.
All the new banks except one have successfully maintained the required provisions at
end-December 2020. The ratio of provision maintained by the new banks to their required
provision was 100.1 percent whereas the same for the industry was 99.8 percent as at
end-December 2020.
CHART 2.84: COMPARISON OF ROA AND ROE IN 2020 CHART 2.85: COMPARISON BY SOURCES OF INCOME IN 2020
12.0% 2.5%
9.6% 2.0%
1.9%
10.0% 2.0% 1.7%

8.0% 1.5% 1.2%

6.0%
4.3% 1.0%
4.0%
0.5%
2.0% 0.9%
0.3% 0.0%
0.0% Net Interest Income to Total Non-Interest Income to Total
ROA ROE Assest Asset

New Bank Banking Industry New Banks Banking Industry

Source: DOS, BB; computation: FSD, BB.

It appears from Chart 2.84 that the ROA of the new banks (0.9 percent) was much higher than
that of the banking industry (0.3 percent) in CY20. Except one (01) bank, the profitability trend
of new banks was in a good condition. The ROE of new banks increased from 2.10 percent in
CY19 to 9.6 percent in CY20, which was much higher than the industry ROE of 4.3 percent. The
net interest income to total assets of the new banks was higher whereas non-interest income
to total assets was lower than the industry average (Chart 2.85).

58 Financial Stability Report 2020

 CHART 2.86: CRAR OF NEW BANKS

18.0% 15.8%
16.0% 14.5% 14.6%
13.2%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2017 2018 2019 2020
Source: DOS, BB; computation : FSD, BB.

In CY20, the capital to risk-weighted assets ratio (CRAR) of the new banks (13.2 percent) was
higher than the industry CRAR (11.6%) and also higher than that of other categories of banks
except foreign banks operating in the industry (Chart 2.86). It is to be mentioned here that all
the new banks except one have been successful in maintaining the minimum required CRAR.

BOX 2.3: COMPOSITE FINANCIAL STABILITY INDEX (CFSI): DECEMBER 2020

Composite financial stability index (CFSI)43 is used to measure the stability situation of a financial system as well
as to monitor build up of systemic risk in the macro-financial system. More specifically, this is a tool developed
to measure the volatility in the overall financial system. It is an aggregated form of eighteen different indicators
under three sub-indices−Banking Soundness Index (BSI), Financial Vulnerability Index (FVI), and Regional
Economic Climate Index (RECI)44. Using semi-annual data, this index has been updated regularly on a half-yearly
basis. In this current version, movement of CFSI has been plotted for the period spanning December 2009 to
December 202045.

CHART B2.3: COMPOSITE FINANCIAL STABILITY INDEX (CFSI)

4.0
3.0 0.99 1.09
0.88
2.0 0.58
0.52 0.49 0.47 0.45
1.0
0.20 0.11 0.17
0.0 -0.01 0.03
-0.22 -0.21 -0.14
-1.0 -0.29-0.27
-0.44 -0.47 -0.41 -0.42
-2.0
-3.0
-4.0
-5.0 -1.39
Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

BSI FVI RECI CFSI

Notes: Regime of CAR calculation changed twice: Basel I to Basel II in 2010 and to Basel III in 2015; Minimum capital requirement (in
amount) for banks increased (BDT 2 billion in 2007 and BDT 4 billion in 2011); From June 2013, base year of CPI changed (from 1995-
96=100 to 2005-06=100).

43
See FSR 2017 (pp. 46-47) for methodology used to prepare CFSI.
44
See FSR 2019 (pp. 147-148) in Appendix L for the list of indicators used in CFSI.
45
See FSR 2017 (pp. 46-47) for discussions before December 2009.

Financial Stability Report 2020 59

 BOX 2.3: COMPOSITE FINANCIAL STABILITY INDEX (CFSI): DECEMBER 2020 (Contd.)

The CFSI shows that the financial system of Bangladesh at end-December 2020 had a downward trend as
opposed to a stable trend observed for the period from June 2015 to December 2019. The CFSI turned around
in December 2020 compared to June 2020 due to strong measures by the Government of Bangladesh as well
Bangladesh Bank to uplift the economy during COVID-19 pandemic. Consequently, BSI and FVI showed positive
impacts and CFSI is still below zero line due to negative economic growth and negative CPI inflation of major
trading partners of Bangladesh in the second half of 2020, BSI demonstrated its stable trend whereas FVI
increased mainly due to surplus current account balances as well as normalcy in general price index.
Government’s large scale stimulus packages along with BB’s policy supports like special refinance schemes,
liquidity easing, liberal loan classifications etc. to reduce the adverse impacts of COVID-19 outbreak helped
economic activities to rebound gradually after the initial shock, which facilitated to attain a notable real GDP
growth, surpassing the forecasts of IMF and World Bank. Moreover, due to COVID-19 pandemic, the growth of
import is lower than that of export from major trading partners of Bangladesh which is reflected in RECI and
thus increased current account balance. Nevertheless, notable inflow of wage earners’ remittance, long-term
foreign loans from development partners along with BB's support to keep the foreign exchange market stable.
Though BSI and FVI did not fluctuate significantly and RECI belonged to the below zero line, the overall CFSI still
showed the negative impact during the review year. This may create a risk to our economy from the external
sector which could be minimized by diversifying products lines and destinations. The banking sector has some
challenges about non-performing loan but by increasing recovery against non-performing loan and also
strengthening the BB’s monitoring, the risk to financial sector stability may be minimized in future.

60 Financial Stability Report 2020

Chapter 3
BANKING SECTOR RISKS
Banks need meticulous monitoring and estimating of their credit risk, market risk and
operational risk as per the Basel III framework with the diversified nature of this business and
gradual expansion of services over the years. In 2020, the overall risk of the banking sector,
measured by the risk-weighted assets (RWA) density ratio, demonstrated a downward trend
creating an opportunity to expand banks’ intermediation activities by using various risk
management tools. It would help to accelerate economic growth and recovery during the
pandemic. RWA of market risk showed a comparatively higher rise than those of credit and
operational risk, but the relative share of RWA of market risk is less significant. The rise in
market risk may be minimized by selecting a less risky pool of assets both in local and foreign
currency. Apart from these, banks are always careful in matching their assets with liabilities by
applying fixed interest rates, and by discouraging speculative deals. Cumulatively, all the
banks have 49.28 percent lending exposure in the corporate sector and rated exposures were
increased for the corporate sector in 2020. For this, banks got the flexibility to maintain lower
capital compared to that of the previous year. Presently the overall capital to risk-weighted
asset ratio (CRAR) of the banking sector stood at 11.64 percent (required level 10 percent) and
this existing level of CRAR would be adequate to withstand any insolvency risk in the future.
Various risk aspects relating to the assets and respective allocation of the capital of the
banking sector in Bangladesh are discussed in this chapter. For better analysis and
understanding, banks are categorized into five different groups based on their inherent
features, and risk perspectives in terms of credit, market and operational risks. Table 3.1
demonstrates the categorization of banks and each category’s share in total banking sector
assets as of December 2020.
TABLE 3.1: GROUPING OF BANKS FOR RISK ANALYSIS
Bank Description of the group Number of banks Share in total banking
Group sector assets (in percent)
Group 1 Private commercial banks (Long-standing conventional
22 43.2%
banks)
Group 2 State-owned and Private commercial banks under
10 27.5%
special attention46
Group 3 Private commercial banks (Full-fledged Islamic banks) 7 20.1%
Group 4 Foreign commercial banks 9 5.5%
Group 5 Fourth-generation47private commercial banks 10 3.7%
Source: Department of Off-site Supervision (DOS), Bangladesh Bank.

3.1 OVERALL RISK PROFILE OF THE BANKING SECTOR

Table 3.2 and Chart 3.1 show the trend in risk-weighted assets (RWA) density ratio, the ratio of
RWA to total assets, of different groups of banks during the period 2015-202048. It is
mentionable that the higher density ratio reflects that banks are exposed to more risky assets.
The industry’s RWA density ratio has decreased from 64.3 percent in 2019 to 61.6 percent in
2020. Among the specified groups, Group 1, 4 and 5 have a higher RWA density ratio (Table
3.2). The ratio increased for Group 5 while it decreased for the rest of the groups in 2020.
46
Banks operating under memorandum of understanding (MOU) or Directives of Bangladesh Bank (DOBB).
47
Banks granted license in 2013 onward to operate as scheduled banks in Bangladesh.
48
The RWA density ratio is a simple and quick measure of weighted average relative risk of a bank's on- and
off-balance sheet exposures.

Financial Stability Report 2020 61

 TABLE 3.2: RISK-WEIGHTED ASSET DENSITY RATIO CHART 3.1: TRENDS OF RISK-WEIGHTED ASSET DENSITY RATIO
(BANK GROUPS) 90

Risk Weighted Asset Density Ratio (In Percent)

(In Percent)
80
Banks 2015 2016 2017 2018 2019 2020
Group
70
Group 1 80.1 79.9 76.2 77.8 71.2 68.9

60
Group 2 49.3 46.9 48.3 50.5 53.1 51.9

Group 3 63.1 64.1 63.3 63.8 60.1 56.8 50

Group 4 78.3 77.3 83.1 71.9 73.9 59.7

40
Group 5 78.3 77.1 77.8 74.6 71.6 76.2 2016 2017 2018 2019 2020
Group 1 Group 2
All Banks 67.4 66.7 66.9 67.0 64.3 61.6 Group 3 Group 4
Group 5 All Banks

Source: Data-DOS; Calculation-Financial Stability Department (FSD), Bangladesh Bank.

3.2 OVERALL RISK STRUCTURE IN BANKS

As per Basel III, banks’ RWAs are broadly attributed to credit, operational and market risks49.
Credit Risk-Weighted Assets (CRWA) amount to BDT 9,869.07 billion in 2020, which is 6.83
percent higher than that of 2019. Operational Risk-Weighted Assets (ORWA) also increased
from BDT 956.50 billion to BDT 1030.50 billion, i.e., by 7.74 percent during this period.
However, Market Risk-Weighted Assets (MRWA) increased by 55.14 percent and stood at BDT
426.89 billion in 2020. The CRAR of the banking industry also increased from 11.57 percent at
the end-December 2019 to 11.64 percent at the end-December 2020, which was above the
minimum capital requirement (MCR) of 10.0 percent.
Chart 3.2 shows the share of RWA attributed to credit, operational and market risks. The credit
risk-weighted asset was 87.1 percent of the total RWA of the banking system as of December
2020, whereas the RWA associated with the market and operational risks were 3.8 and 9.1
percent respectively. The chart also shows that 90.5 percent of the credit risk was derived from
balance sheet exposures. In 2020, RWA for credit risk and operational risk as a ratio of total
RWA decreased by 1.1 and 0.1 percentage points respectively. But market risk increased as a
ratio of total RWA by 1.2 percentage points.
CHART 3.2: OVERALL RISK AND CREDIT RISK STRUCTURE
Operational Credit Risk Structure under Basel III: End December 2020
RWA Banking Sector Risk Structure under
basel III: End December 2020 OBS Risk
9.1% 9.5%
Market RWA
3.8%

BS Risk
Credit RWA BS Risk
90.5% OBS Risk
87.1%

Note: *BS= balance Sheet, OBS= Off -Balance Sheet.

Source: Department of Off-site Supervision, Bangladesh Bank.

49
Credit risk can be defined as the probability of loss (due to non-recovery) emanating from the credit extended, as a result of
the non-fulfillment of contractual obligations arising from unwillingness or inability of the counter-party or for any other
reason.
Market risk can be defined as the risk of loss in on-and off-balance sheet positions arising from movements in market prices.
Operational Risk can be defined as the risk of loss resulting from inadequate or failed internal processes, people and systems
or from external events. This definition includes legal risk, but excludes strategic and reputation risk.

62 Financial Stability Report 2020

3.3 CREDIT RISK STRUCTURE IN BANKS
In 2020, the credit risk of top 5 banks accounted for 25.6 percent of the total credit risk of the
banking system, while about 40.4 percent of credit risk was held by the top 10 banks (Table
3.3). The concentration of credit risk within the top 5 banks increased by 0.6 percentage points
compared with 2019. The share of credit risk of top 5 banks in terms of overall industry risk was
22.3 percent in 2020 compared to 22.0 percent in 2019.
TABLE 3.3: CREDIT RISK IN THE BANKING INDUSTRY UNDER BASEL III (END-DECEMBER 2020)
Banks Share in industry credit risk Share in industry overall risk
Top 5 25.6% 22.3%
Top 10 40.4% 35.2%
All banks 100.0% 87.1%
Source: Department of Off-site Supervision, Bangladesh Bank.

The group-wise analysis of credit risk (Table 3.4) reveals that the industry’s credit risk is mostly
concentrated in Group 1 and Group 2. The combined shares of these two groups are 71
percent of industry credit risk and 61.9 percent of aggregate industry risk. Group 1 (22 banks),
possessing 43.2 percent of total assets, contained about half of the industry credit risk (48.5
percent) and 48.3 percent of overall industry risk. Group 2 (10 banks), on the other hand,
holding 27.5 percent of the assets but containing about one-fifth of the industry credit risk
(22.5 percent) and 23.3 percent of the overall industry risk. Full-fledged Islamic banks, foreign
commercial banks and fourth-generation domestic private banks respectively shared 19.3,
5.2, and 4.6 percent in the industry’s credit risk.
TABLE 3.4: GROUP-WISE DISSECTION OF CREDIT RISK IN THE BANKING SYSTEM (END-DECEMBER 2020)
Share in overall Share of total RWA in
Bank Group Share in industry’s credit risk
industry risk overall industry risk1
Group 1 48.5% 42.3% 48.3%
Group 2 22.5% 19.6% 23.3%
Group 3 19.3% 16.8% 18.6%
Group 4 5.2% 4.5% 5.3%
Group 5 4.6% 4.0% 4.5%
Total 100.0% 87.1% 100.0%
Source: Department of Off-site Supervision, Bangladesh Bank.

3.4 MARKET RISK STRUCTURE IN BANKS

According to the Basel III framework, market risks are mainly attributed to the risks pertaining
to interest rate and price-sensitive instruments and equities in the trading book, foreign
exchange risk and commodity risk in both the trading and banking book. Market risks,
therefore, comprise of interest rate, equity price, and exchange rate risk.
Chart 3.3 illustrates overall market risk as well as the composition of different types of market
risks in banks. Market risk has a small share, i.e., 3.8 percent of the total banking sector's risks
(left panel). Notably, this risk has increased both in terms of its share in the total banking
sector's risk (2.6 percent in 2019) and also in risk-weighted assets' nominal amount (55.2
percent increase in 2020). Within market risk, the share of equity price risk was maximum, i.e.,
37.0 percent while foreign exchange rate risk and interest rate risk contributed 28.8 percent
and 34.1 percent respectively (right panel).

50
Total risk includes credit risk, market risk and operational risk.

Financial Stability Report 2020 63

 CHART 3.3: MARKET RISK COMPOSITION

Market Risk under Basel III: End December 2020 Market Risk Structure, 2020

FX Position Interest Rate

Risk Risk
Market Risk 28.8% 34.1%
3.8%

Equity Price
Risk
37.0%

Credit and
Operational
Risks Market Risk Credit and Operational Risks Interest Rate Risk Equity Price Risk
96.2% FX Position Risk

Source: Data-DOS; Calculation-FSD.

Table 3.5 demonstrates that banks in the categories of Group 1 and Group 2 were jointly
exposed to 85.8 percent of the total interest rate risk in the segment of market risk in 2020,
which was 82.2 percent in 2019. The equity price risk of these two groups stood at 87.5
percent in 2020 as compared to 86.7 percent in 2019. Moreover, the banks under Group 1 and
Group 2 possess 77.8 percent of the industry's total foreign exchange rate risks- a notable
increase from 58.8 percent in the previous year. However, Group 3, consisting of all the Islamic
banks, possessed 15.8 percent of the exchange rate risks in 2020, indicating a declining trend
after 2019 which was 23.9 percent.
TABLE 3.5: GROUP-WISE DISSECTION OF MARKET RISK IN THE BANKING SYSTEM

Share in industry interest Share in industr y equity Share in industry Exchange

Banks price risk
rate risk rate risk
Group 1 46.9% 58.4% 30.1%
Group 2 38.9% 29.1% 47.7%
Group 3 0.0% 9.6% 15.8%
Group 4 3.4% 0.0% 3.9%
Group 5 10.9% 2.8% 2.4%
Total 100.0% 100.0% 100.0%
Source: Data-DOS; Calculation-FSD.

The banks under Group 4 and Group 5 consisting of nine foreign banks and ten
fourth-generation commercial banks respectively (combined industry share of which are less
than 10 percent in terms of assets) were found to be less exposed to market risk in the
banking system.

3.4.1 INTEREST RATE RISK (IRR)

The share of interest rate risk (IRR)51 in the total RWA of the banking system increased slightly
from 0.65 percent in 2019 to 1.3 percent in 2020. The RWA associated with interest rate risk
also increased by 114.7 percent from the previous year. However, IRR contributed 34.1 percent
of the market RWA in 2020, which was 24.7 percent in the previous year. The banks’ capital
charge for interest rate risk was BDT 14.56 billion in 2020, which was BDT 6.8 billion in 2019.
Table 3.6 shows that the top 5 banks’ interest rate risk constituted 54.4 percent of industry
interest rate risk in 2020. Two SOCBs, three conventional PCBs are ranked in the top 5 in terms
51
Interest rate risk can be defined as potential risk to interest sensitive assets and liabilities of a bank's on- and
off-balance sheet items arising out of adverse or volatile movements in market interest rate.

64 Financial Stability Report 2020

of capital charges for IRR in the banking system. In comparison to 2019, interest rate RWA to
industry's total RWA for both top 5 banks and top 10 banks decreased in 2020. The IRR shares
for the top 5 banks and top 10 banks decreased in 2020 while their shares in market risk as
well as in overall risk increased in 2020, compared to corresponding figures of 2019.
TABLE 3.6: INTEREST RATE RISK IN THE BANKING SYSTEM
Banks Interest rate risk Share in market risk Share in overall risk
Top 5 54.4% 18.6% 0.7%
Top 10 74.0% 25.2% 1.0%
All Banks 100.0% 34.1% 1.3%
Source: Data-DOS; Calculation-FSD.

3.4.2 EQUITY PRICE RISK

The RWA assigned to equity price risk52 constituted 1.4 percent of the total RWA of the
banking system and 37 percent of the total market risk as of December 2020. The banks'
capital charge for equity price risk was BDT 15.81 billion at the end of December 2020, which
is almost 3.5 billion higher than the previous year (12.3 billion in 2019).
TABLE 3.7: EQUITY PRICE RISK IN THE BANKING SYSTEM
Banks Equity price risk Share in market risk Share in overall risk
Top 5 35.0% 13.0% 0.5%
Top 10 58.2% 21.6% 0.8%
All Banks 100.0% 37.0% 1.4%
Source: Data-DOS; Calculation-FSD.

Table 3.7 shows that the top 5 banks constituted 35 percent of industry equity price risk in
2020. Two SOCBs and three PCBs were ranked in the top 5 in terms of capital charges for
equity price risk in the banking system. In comparison with 2019, the share of equity price
RWA in the industry's total RWA marginally increased for top 5 banks (from 0.44 percent to
0.50 percent) as well as for top 10 banks (from 0.73 percent to 0.80 percent) in 2020.

3.4.3 EXCHANGE RATE RISK

The RWA assigned to exchange rate risk53 constituted 1.1 percent of the total RWA of the
banking system while the share was 28.8 percent of the aggregate market risk as of December
2020. The banks' capital charge for exchange rate risk increased to BDT 12.3 billion at the
end-December 2020 from 8.4 billion at the end-December 2019.
Table 3.8 shows that the top 5 and top 10 banks were exposed to 53.6 and 70.1 percent
respectively of the industry's exchange rate risk in 2020. The shares were lower at 37.7 percent
and 56.7 percent in 2019. Shares of exchange rate risk in market risk as well as overall risk for
the top 5 banks and top 10 banks increased in 2020 as compared to the previous year.

52
Equity price risk is the potential risk of reduction in profitability or capital caused by adverse movements in the
values of equity securities, owned by the banks, whether traded or non-traded, or taken as collateral securities
for credits extended by the bank. Equity risk, at its most basic and fundamental level, is the financial risk involved
in holding equities in a particular investment.
53
Exchange rate risk can be defined as the variability of a firm's earnings or economic value due to changes in the
exchange rate.

Financial Stability Report 2020 65

 TABLE 3.8: EXCHANGE RATE RISK IN THE BANKING SYSTEM
Banks Exchange rate risk Share in market risk Share in overall risk
Top 5 53.6% 15.5% 1.3%
Top 10 70.1% 20.2% 0.8%
All Banks 100.0% 28.8% 1.1%
Source: Data-DOS; Calculation-FSD.

3.5 OPERATIONAL RISK

As mentioned earlier, the RWA assigned to operational risk54 was 9.1 percent of the total RWA
of the banking industry at end-December 2020. The required capital charge for operational
risk as of December 2020 was BDT 103.05 billion, which was 7.4 billion higher than that of the
previous year.
TABLE 3.9: OPERATIONAL RISK UNDER BASEL III IN THE BANKING INDUSTRY
Banks Share in industry operational risk Share in industry overall risk
Top 5 27.9% 2.5%
Top 10 44.7% 4.1%
All Banks 100.0% 9.1%
Source: Data-DOS; Calculation-FSD.

Table 3.9 reveals that the top 5 and top 10 banks were exposed to 27.9 and 44.7 percent
respectively of the industry’s operational risk in 2020. These shares were almost similar in the
previous year.
TABLE 3.10: GROUP-WISE DISSECTION OF OPERATIONAL RISK IN THE BANKING SYSTEM
Banks Share in industry operational risk Share in overall industry risk
Group 1 47.11% 4.29%
Group 2 24.91% 2.27%
Group 3 16.06% 1.46%
Group 4 7.98% 0.73%
Group 5 3.95% 0.36%
Total 100.00% 9.10%

Table 3.10 depicts the group-wise operational risk in 2020. It reveals that banks in the
categories of Group 1 and Group 2 are jointly exposed to 72 percent of the industry’s
operational risk. The shares of operational risk in the overall industry risk for the bank groups
remained almost the same as that of 2019.

3.6 SECTORAL EXPOSURES AND RISK

Table 3.11 shows that banks have 49.28 percent lending exposure in the corporate sector.
Around 23 percent of total asset’s claim is on the Government securities and balance with
Bangladesh Bank while 18.66 percent of the credit is supplied to the Retail and SMEs sector.

54
Operational Risk can be defined as the risk of loss resulting from inadequate or failed internal processes, people and
systems or from external events. This definition includes legal risk, but excludes strategic and reputation risk.

66 Financial Stability Report 2020

 TABLE 3.11: SECTORAL EXPOSURES OF BANKS AND RISKS (END-DECEMBER 2020)
Sectoral Exposures of Credit Share of Total RWA RWA Density
Sector/Borrower
(In Billion BDT) Exposure (In Billion BDT) Ratio 1
Government & BB 3212.67 23.08% 0.00 0.0%
PSE 112.34 0.81% 32.52 28.9%
Banks & FIs 1136.89 8.17% 313.42 27.6%
Corporate 6859.42 49.28% 4473.28 65.2%
Retails & SMEs 2597.27 18.66% 1943.58 74.8%
Source: Data-DOS; Calculation-FSD.

Table 3.11 also reveals that among the sectors, the Retail and SMEs sector’s credit exposures
have the highest RWA Density Ratio of 74.8 percent, because almost all the retail and SME
loans are provided for trading purpose, where collateral securities are minimum and higher
risk weights are assigned for such businesses as per Basel norms. Corporate lending
exposures have an RWA Density Ratio of 65.2 percent while the placement and lending to
Banks and FIs have a lower RWA Density Ratio of 27.6 percent in 2020.

3.7 CREDIT RISK MITIGANTS

The rated exposures increased for the corporate sector but decreased for banks and financial
institutions (FIs) in 2020. More specifically, the percentage of best-rated exposures (BB RG 1)
increased for the corporate sector but decreased for the banks and FIs.
In Bangladesh, banks’ exposures to non-financial corporations (NFCs) and other banks and
financial institutions are rated by External Credit Assessment Institutions (ECAIs) to determine
the RWA and minimum capital requirements against the credit risks as per Basel norms. The
higher risk weights are allocated for unrated exposures, therefore, banks are encouraged to
bring more exposures under ECAIs’ rating for mitigating the credit risks effectively. The better
the ratings of the exposures, the less likely the banks are exposed to default risk/counterparty
risk. Chart 3.4 shows the rated and unrated exposures to NFCs and banks and FIs in 2019 and
2020.
The total exposure of the banking system to the corporate sector increased, but exposure to
banks and NBFIs decreased in December 2020 compared to that of December 2019. The
overall exposure to the corporate sector was BDT 6,859.42 billion at the end-December 2020,
recording an increase of BDT 570.41 billion from the exposure in 2019. It is evident from Chart
3.4 that the overall rated exposure of the banking system to corporate sectors remained
almost same. In December 2020, the total rated exposure was 84.35 percent, and overall, the
best-rated exposure was 21.90 percent.

55
RWA Density Ratio = Exposures of Credit / RWA.

Financial Stability Report 2020 67

 CHART 3.4: BANKS' EXPOSURES TO CORPORATE AND BANKS & NBFIs
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2019 2020 2019 2020
Exposure to Corporate Exposure to Bank & NBFIs

BB RG 1 Other BB RG Unrated

Source: Data-DOS, Calculation-FSD.

Within the rated exposure, best-rated exposure (BB RG 1) increased by 1.4 percentage points
and other BB RGs also increased by 1.1 percentage points in December 2020 compared to
those of December 2019. The overall credit exposure to banks and FIs was BDT 1,136.89 billion
in December 2020, which was BDT 146.41 billion less than the exposure in December 2019.
Chart 3.4 suggests that the total rated exposures to banks and FIs are notably high despite a
slight decline in 2020. In 2020, 52.3 percent of matured credit exposures to banks and FIs
received BB RG1, rendering a 5.1 percentage point decrease from 57.4 percent in 2019.
However, the other BB-rated exposures to banks and FIs picked up by 1.03 percentage points
in 2020 compared to 2019.

68 Financial Stability Report 2020

Chapter 4
BANK AND FI RESILIENCE
Bangladesh Bank (BB) conducts quarterly stress tests on banks and FIs to ascertain their
resilience throughout the year under different plausible shock scenarios. This hypothetical
test is used as a risk management tool to instruct banks/FIs for taking safety measures in
respect of capital maintenance and liquidity management against any adverse economic
and financial condition in future. This chapter analyzes the results of stress tests on banks
and FIs as well as banking and FI sector based on the data as of end-December 2020. Stress
test results depict that both the banking and FIs sector would remain moderately resilient
to different shock scenarios.
4.1 BANKING SECTOR RESILIENCE
Stress test on bank is conducted through sensitivity analysis, incorporating impacts of the
minor shock scenario for credit risk, market risk and liquidity risk. Under each scenario, the
after-shock Capital to Risk-weighted Assets Ratio (CRAR) is compared with the minimum
regulatory requirement of 10 (ten) percent56 with Capital Conservation Buffer (CCB) of 2.5
percent. Hence, particular attention is paid to credit risk, which contributes to the major risk
for the banking sector of Bangladesh.
At end-December 2020, in the pre-shock scenario, 48 scheduled banks out of 58 were found
compliant and appeared to be resilient in maintaining the minimum regulatory requirement
of CRAR of 10 percent, while the remaining 10 banks found non-resilient in maintaining the
minimum regulatory requirement after adjustment of cumulative loss and provision shortfall.
In addition, under Basel III capital accord, maintaining CCB of 2.50 percent with existing CRAR
of 10 percent, 44 banks were found resilient. Table 4.1 depicts the CRAR level of banks at
pre-shock scenario.
TABLE 4.1 : CAPITAL ADEQUACY SCENARIO OF THE BANKING SECTOR

CRAR (%) Number of Banks

< 10% 10
≥ 10% but < 12.50% 4
≥ 12.50% 44

4.1.1 STRESS ON CAPITAL DUE TO CREDIT RISK

a) Sensitivity test for credit risk have been conducted to assess the impact of different
shocks on banks’ capital adequacy position. The proposed capital position has been
ascertained by applying the shock of 3 percent increase in gross NPL57 ratio. The
increase of NPL is a concern for credit risk, adversely impact on risk weighted assets and
banks are required to maintain additional capital to absorb credit risk. The existing and
after-shock CRAR are exhibited in Table 4.2. As per Table 4.2, the banking sector's CRAR
would have declined to the level of 10.12 percent from existing level of 11.57 percent.
Under this stress scenario, 3 out of 48 compliant banks might become non-compliant in
maintaining minimum capital adequacy requirement (10%).
56
The results are based on the unaudited data for the calendar year ended at December 2020.
57
NPL (Non-performing loan) means aggregate of loans in the substandard, doubtful, and bad/loss category.

Financial Stability Report 2020 69

TABLE 4.2 : STRESS TEST FOR CREDIT RISK: INCREASE IN NPLS
(In Percent)
Pre-shock Scenario Gross NPL Ratio Required Minimum CRAR Maintained CRAR
Banking System 7.66 10.00 11.57
Stress Scenario
Gross NPL Ratio Required Minimum CRAR After-shock CRAR
Minor Shock: Increase in NPLs by 3% 10.43 10.00 10.12
Source: FSD, BB.

CHART 4.1: PROBABLE NPL RATIO AFTER MINOR SHOCK

In Chart 4.1, existing NPL ratios of 4 quarters
of CY20 are illustrated with a blue solid line
14.00%
whereas the red line shows the stressed NPL
12.00% ratio under 3% increase in NPLs scenario
10.00%
applicable for the same period. Under the
minor shock scenario, the banking sector’s
8.00% gross NPL ratio of December 2020 is likely to
6.00%
rise to the level of 10.43 percent from the
Mar-20 Jun-20 Sep-20 Dec-20 existing level of 7.66 percent. The rise of NPL
Existing NPL NPL After Shcok negatively affected the overall capital
Source: FSD, BB . adequacy position of the banking sector.
b) The second test has been conducted on credit concentration risk of banks to examine the
effect on capital adequacy in case of bank-wise default of the top 3 large individual/group
borrowers (Table 4.3). Minor shock result depicts that the capital adequacy of the banking
system would decrease to 9.53 percent from existing 11.57 percent, while 17 out of 48
compliant banks would likely become non-compliant in maintaining minimum capital
adequacy requirement (10%).
TABLE 4.3 : STRESS TEST FOR CREDIT RISK: DEFAULT OF TOP LARGE BORROWERS
(In Percent)
Pre-Shock Scenario Required Minimum CRAR Maintained CRAR
Banking System 10.00 11.57
Stress Scenario After-Shock CRAR
Minor Shock: Default of top 3 large borrowers 9.53
Source: FSD, BB.

c) The third test has been conducted on the sectoral concentration of credit risk of banks to
examine the effect on capital adequacy in case of an additional percentage of the highest
exposed sector's loans directly downgraded to bad/loss (Table 4.4). If an additional 3
percent of the highest exposed sector's loans directly downgraded to bad/loss, the
banking sector's CRAR would likely to decrease to 11.43 percent from existing 11.57
percent. Under this stress scenario, only 1 out of 48 compliant banks would likely become
non-compliant in maintaining minimum capital adequacy requirement (10%).
TABLE 4.4 : STRESS TEST FOR CREDIT RISK: INCREASE IN NPLS OF THE HIGHEST EXPOSED SECTOR
(In Percent)
Pre-shock Scenario Required Minimum CRAR Maintained CRAR
Banking System 10.00 11.57
Stress Scenario After-Shock CRAR
Minor Shock: 3% of performing loans of highest exposed sector directly 11.43
downgraded to bad/loss
Source: FSD, BB.

70 Financial Stability Report 2020

 d) The fourth test (Table 4.5) deals with the fall in the forced sale value (FSV) of mortgaged
collateral. Minor shock has been applied on the FSV of mortgaged collateral assuming
its value would decline by 10 percent under minor stress scenario. Shock result depicts
small impact on banking sector’s CRAR and no bank would become non-compliant to
maintain minimum capital requirement.

TABLE 4.5 : STRESS TEST FOR CREDIT RISK: FALL IN THE FSV OF MORTGAGED COLLATERAL

(In Percent)
Pre-Shock Scenario Required Minimum CRAR Maintained CRAR
Banking System 10.00 11.57
Stress Scenario After-Shock CRAR
Minor Shock: 10% fall in the forced sale value (FSV) of mortgaged collateral 11.07
Source: FSD, BB.

e) The fifth test (Table 4.6) assumes negative shifts in the existing NPL categories, due to
some adverse economic events for the banks, which might result in additional provision
requirement. For the minor shock scenario, 5 percent of the substandard loans
downgraded to doubtful, and 5 percent of the doubtful loans downgraded to the
bad/loss category. Shock result depicts that the capital adequacy of the banking system
would decrease to 10.97 percent from existing 11.57 percent, while only 1 out of 48
compliant banks would likely become non-compliant in maintaining minimum capital
adequacy requirement (10%).

TABLE 4.6 : STRESS TEST FOR CREDIT RISK: NEGATIVE SHIFT IN NPL CATEGORIES
(In Percent)
Pre-Shock Scenario Required Minimum CRAR Maintained CRAR
Banking System 10.00 11.57
Stress Scenario After-Shock CRAR
Minor Shock: 5% negative shift in the NPLs categories 10.97
Source: FSD, BB.

f ) The stress test results indicate that the credit risk is the major risk for the banks in terms
of its impact on CRAR. The sensitivity analysis on the banking sector’s credit portfolio
and its impact on capital adequacy reveals that the sector is moderately resilient with
different types of credit shocks except shock for the default of top 3 borrowers (Chart 4.2
and 4.3). When the shock is applied for the default of the top 3 borrowers on the data of
end-December 2020, along with the 10 under capitalized banks, additional 17 banks
would become non-compliant in maintaining the minimum required capital (10%).
Besides, additional 3 banks would become non-compliant for 3% increase in NPLs.
Similarly, if the CCB requirement is considered, additional 12 and 11 banks would not be
able to maintain minimum capital requirement with CCB (12.50%) for the shocks of
increase in NPLs by 3% and default of top 3 large borrowers respectively (Chart 4.3).
Hence, the stress test results identify that the default of top large borrowers is likely to
have the highest impact on the banking sectors' resilience in terms of capital, which is
followed by the increase in NPLs.

Financial Stability Report 2020 71

 CHART 4.2: STRESS TESTS: MINOR SHOCK ON DIFFERENT CREDIT RISK FACTORS
30
27

Number of Under Capitalized Bank

25

20
13
15 11 11
10
10

0
Increase in NPLs of
Default of top 3 Fall in the FSV of Negative shift in
Increase in NPLs highest exposed
borrowers Collateral NPL categories
Sector
Before Shock Failure in Maintaining MCR 10 10 10 10 10
Failure in Maintaining MCR under Stress 13 27 11 10 11

Note: MCR- Minimum Required Capital.

Source: FSD, BB.

CHART 4.3: STRESS TESTS: MINOR SHOCK ON DIFFERENT CREDIT RISK FACTORS (WITH CCB)

14
Number of Banks Maintain MCR but Fail to

12
11
12

10
Maintain MCR with CCB

8
5 5 5
6

0
Increase in NPLs
Default of top 3 Fall in the FSV of Negative shift in
Increase in NPLs of highest
borrowers Collateral NPL categories
exposed Sector
Before Shock Maintaining MCR but Failure in
4 4 4 4 4
Maintaining MCR with CCB
Maintaining MCR but Failure in Maintaining
12 11 5 5 5
MCR with CCB under Stress

Source: FSD, BB.

4.1.2 LIQUIDITY RISK MANAGEMENT

The liquidity stress test58 considers excessive59 withdrawal of demand and time deposits both in
local and foreign currency. A bank is considered to be adequately-liquid if it can survive (after
maintaining SLR60) for 5 consecutive business days under a stressed situation. Standardized
shocks are 2, 4 and 6 percent withdrawal of deposits, in excess of bank’s normal withdrawal of
deposit. At end-December 2020, the banking sector as a whole would remain resilient against
liquidity stress scenarios of 2, 4 and 6 percent additional withdrawal of deposits.

4.1.3 SENSITIVITY TO MARKET RISK

The banking sector is found to be fairly resilient in terms of different market shocks61. This sector,
as a whole, would remain compliant in maintaining the minimum capital requirement under
the minor level shock on the interest rate, exchange rate and equity price (Table 4.7, 4.8 and 4.9).
More importantly, no bank would become non-compliant to maintain minimum capital
requirement for market shocks scenarios.

58
A liquidity stress test shows how many days a bank and the banking sector would be able to survive in a situation
of liquidity drain without resorting to liquidity from outside (other banks, financial institutions or central bank).
59
Higher than usual.
60
SLR= Statutory Liquidity Requirement.
61
Market risk shocks: Interest rate, exchange rate and equity price movements.

72 Financial Stability Report 2020

TABLE 4.7 : STRESS TEST: INTEREST RATE RISK (In Percent)
Pre-Shock Scenario Required Minimum CRAR Maintained CRAR
Banking System 10.00 11.57
Stress Scenario After-Shock CRAR
Minor Shock: 1% increase in interest rate 11.02
Source: FSD, BB

TABLE 4.8 : STRESS TEST: EXCHANGE RATE RISK

(In Percent)
Pre-Shock Scenario Required Minimum CRAR Maintained CRAR
Banking System 10.00 11.57
Stress Scenario After-Shock CRAR
Minor Shock: Currency appreciation/depreciation by 5% 11.53
Source: FSD, BB.

TABLE 4.9 : STRESS TEST: EQUITY PRICE RISK4.1.4 CALCULATION OF COMBINED STRESS TEST
(In Percent)
Pre-Shock Scenario Required Minimum CRAR Maintained CRAR
Banking System 10.00 11.57
Stress Scenario After-Shock CRAR
Minor Shock: Fall in the equity prices by 10% 11.31
S ource: FSD, BB.

4.1.4 CALCULATION OF COMBINED STRESS TEST

In case of combined shock (Summation of shock results of Increase in NPLs, Fall in the FSV of
Collateral, Negative Shift in NPL categories, Interest Rate Shock, FX Currency Shock and Equity
Price Shock), the banking sector's CRAR would likely to decrease to 8.15 percent from existing
11.57 percent as per Table 4.10.

TABLE 4.10 : STRESS TEST: COMBINED SHOCK

(In Percent)
Pre-shock Scenario Required Minimum CRAR Maintained CRAR
Banking System 10.00 11.57
Stress Scenario After-Shock CRAR
Combined Minor Shock 8.15
Source: FSD, BB.

4.1.5 BANKING SECTOR RESILIENCE AT A GLANCE

The banking sector seems to be resilient in maintaining minimum regulatory requirements in

all specified types of minor level credit related shocks scenarios except for credit
concentration risk. However, most of the banks, as well as the banking system, would also
likely to remain resilient against interest rate, exchange rate, equity price, and liquidity stress
scenarios (Chart 4.4).

Financial Stability Report 2020 73

 CHART 4.4: BANKING SECTOR RESILIENCE IN DIFFERENT SHOCK SCENERIOS
(AT MINOR LEVEL SHOCK)
Default of top sectoral exposure
2.5

2.0
Equity price shock Default of top-3 large borrowers
1.5

1.0

0.5

Foreign exchange shock 0.0 Negative shift in NPL categories

Decrease in the FSV of the

Interest rate shock collateral

Increase in NPLs

Change in CRAR in Percentage Point

Source: FSD, BB.

4.2 RESILIENCE OF THE FINANCIAL INSTITUTIONS

A stress test on the financial institutions (FIs) is conducted to assess the resilience on a
standalone as well as a system-wide basis with different shock scenarios for credit risk, interest
rate risk, equity price risk and liquidity risk.
FIs are mainly concern for different types of credit risk. Generally, NPL to loan ratio, known as
Infection Ratio, is taken as the main measure for ascertaining the sensitivity of the different
segments of credit risk. The four areas of credit risk stress test, namely: increase in NPL,
Downward shift in all categories (except BL), Increase in NPL due to shifting of all loan
disbursed in 2 sectors under B/L category and Increase in NPL due to all loan outstanding of
top large borrowers turned in B/L category. If the regulatory capital of the FIs completely
erodes to the zero level due to deterioration of NPL level is called the Critical Infection Ratio.
The ratio of Infection Ratio to the Critical Infection Ratio is used to calculate the Insolvency
Ratio (IR). The IR is used to identify the percentage of FIs moving towards insolvency. To derive
the Weighted Insolvency Ratio (WIR), the weights for 50.0 percent, 30.0 percent and 20.0
percent are given on after-shock IR in respect of minor, moderate and major level shocks
respectively.
On the other hand, resilience levels for interest rate, credit and equity price shocks of the FIs
are set with the minimum Capital Adequacy Ratio (CAR). Whereas, resilience level for liquidity
shock is measured by the asset-liability maturity bucket. In the stress test it is checked
whether an FI has an adequate capital base and adequate liquidity after the shock impact.
Then the Weighted Average Resilience (WAR) of FI is calculated based on the weights of 10.0
percent for interest rate, 60.0 percent for credit, 10.0 percent for equity price and 20.0 percent
for liquidity irrespective of three levels of shock scenarios.

74 Financial Stability Report 2020

Both the WAR and WIR of FIs are measured in a scale of 1 to 5 (best to worst) grades. Then WAR
is categorized as either A (for grade 1) or B (for grade 2 and 3) or C (for grade 4 and 5) zone and
WIR is categorized as either 1 (for grade 1) or 2 (for grade 2 and 3) or 3 (for grade 4 and 5) zone.
Finally, the WAR-WIR Matrix expresses the overall financial strength and resilience of an FI as
either Sound (for WAR-WIR Matrix A1, A2) or Moderate (for WAR-WIR Matrix A3, B1, B2) or Weak
(for WAR-WIR Matrix B3, C1, C2, C3)62.

CHART 4.5: STRESS TESTS ON FINANCIAL INSTITUTIONS

20
18
16
Number of FIs

14
12
10
8
6
4
2
0
CY2017 CY2018 CY2019 CY2020*
Green/Sound 4 4 4 18
Yellow/Moderate 19 18 19 3
Red/Weak 10 12 10 13

* According to DFIM Circular Letter No.09, Dated 21/12/2020, the overall rating category of FIs changed to
Sound, Moderate and Weak.
Source: DFIM, BB.

FIs Stress test results, based on the data as of end-December 2020, reveal that 18 out of 34 FIs
are in Sound condition and 3 FIs are in Moderate condition. Hence, 21 FIs would have
performed as resilient institutions during October-December 2020 quarter. On the other
hand, 13 out of 34 FIs are in Weak condition during the same period. Overall, a majority of the
FIs would remain resilient in the appearance of different shock scenarios.
The combined results of stress tests for banks depict that the capital adequacy of the banking
system would decrease to 8.15 percent from the existing 11.57 percent. In addition, results of
FIs stress test reveal that, 21 out of 34 FIs would likely to become resilient under stress. Hence,
the banking and FIs systems would remain moderately resilient to different shock scenarios.
However, the significant amount of loans concentrated among few borrowers and
considerable level of NPL in some banks and FIs could pose risk to the overall financial
stability. Strict compliance of the guideline on large loan/single borrower exposure would be
helpful in reducing risks on banks’ exposure to large corporate or to a specific group, specific
sector or specific region. Moreover, the impact of continuing COVID-19 outbreak is another
potential threat to the stability of the financial system. The different policy initiative, as well as
incentive measures so far taken by the central bank and the government, could prevent or
mitigate systemic risk to cope with the COVID-19 pandemic in the upcoming days.

62
According to DFIM Circular Letter No.09, dated 21/12/2020, the overall rating category of FIs revised to Sound, Moderate and
Weak. Previously both WAR and WIR categorized as Green, Yellow and Red zone. Then the WAR-WIR matrix also expressed overall
rating of FIs as Green (GG), Yellow (GY, YG, YY, RY) and Red (GR, YR, RY, RR).

Financial Stability Report 2020 75

Chapter 5
FINANCIAL INSTITUTIONS’ PERFORMANCE
The rising trend in NPL and loan loss provision attributable to poor governance and major
irregularities by a few FIs have been continuing from the previous years. Alongside, the
adverse impact of COVID-19 has largely affected the profitability and impacted the industry’s
overall equity by a 23.2 percent decline in CY20. The overall capital adequacy ratio (CAR) of
this industry lies at 14.2 percent- still above the regulatory minimum requirement of 10
percent. Bangladesh Bank, in this context, has reinforced tight supervision and stern
measures in the form of various regulatory actions to improve the situation over time.

5.1 PERFORMANCE OF FIs

Alongside the banks, Financial Institutions (FIs) have also been playing a crucial role in the
financial system of Bangladesh. FI industry has been complementing the system through
providing a few specialized financial services including the lease financing in Bangladesh.
Presently, FIs are also operating their businesses in term financing, syndicated financing,
bridge financing, SME financing, equity financing, merchant banking, and venture capital, etc.
As of end-December 2020, 34 FIs were operating in Bangladesh with one under the
liquidation process. Out of the total 34 FIs, 3 (three) are fully government-owned, 19
(nineteen) are privately-owned local companies and the remaining 12 (twelve) are
established jointly under local and foreign participation. As of end-December 2020, a total of
277 branches of FIs were in operation.
Bangladesh Bank evaluates the performance of FIs through its various on-site and off-site
tools time-to-time. FIs are also assessed under the CAMELS rating system with six broad
performance indicators: capital adequacy, asset quality, management efficiency, earnings,
liquidity, and sensitivity to market risk. The following sub-sections analyze the performance of
the FIs based on their sources of funds, asset composition and quality, asset-liability ratio, and
profitability. Capital adequacy and liquidity measures are also analyzed in the final sections.

5.1.1 SOURCES OF FUND

The sources of funds for FIs comprise of share capital, bond, borrowing from banks, other
financial institutions and foreign sponsors, term deposits, money at call, placement from
banks and other FIs. As of end-December 2020, deposits, borrowings, and equity constituted
BDT 453.4 billion, BDT 357.4 billion, and BDT 90.9 billion respectively equivalent to 50.3
percent, 39.6 percent, and 10.1 percent of total funds respectively. These shares were 51.9
percent, 34.5 percent, and 13.6 percent respectively at end-December 2019.
In terms of volume, borrowings and deposits of FIs increased by 18.66 percent and 0.33
percent respectively while the equity declined by 23.23 percent in CY20 as compared with
those of the CY19.

Financial Stability Report 2020 77

 CHART 5.1: FIs’ BORROWINGS, DEPOSITS AND EQUITY TREND

467 466.2 451.9 453.4

500
383.7
Amount in billion BDT

400 357.4
318.1 301.2
262 273.4
300 245.7
197.6
200 145.2 158.6
127.9 132.4 114.8 118.4
108.1 103.4 101.3 106.9 112
84.8 90.9
61.9 72.8
100

0
2012 2013 2014 2015 2016 2017 2018 2019 2020

Borrowings Deposits Equity

Source: Department of Financial Institutions and Markets, Bangladesh Bank.

5.1.2 ASSETS COMPOSITION

At end-CY20, aggregate assets of the FI industry reached BDT 901.74 billion registering an
increase of 3.47 percent from that of CY19. The share of loans and leases to total assets was
74.4 percent as of end-December 2020, which was 77.2 percent as of end-December 2019.
The cash balance possessed 0.9 percent of the total asset as of end-December 2020. Other
components such as investments and all other assets (including fixed and non-financial
assets) were 3.2 percent and 21.6 percent of total assets respectively in CY20. Increased share
of all other assets is attributed to 3 percent increase in fixed assets and 16 percent increase in
other financial assets in CY20.
FIs’ total assets to GDP ratio63 accounted for 3.2 percent in 2020 which was 3.4 percent in the
previous calendar year (Chart 5.3).

CHART 5.2: FIs’ ASSET COMPOSITION CHART 5.3: FIs’ TOTAL ASSET TO GDP RATIO
800
4.5%
600 4.0%
3.5%
BDT in Billion

FIs' Asset-to-GDP

3.0%
400
2.5%
2.0%
200
1.5%
1.0%
0
2013 2014 2015 2016 2017 2018 2019 2020 0.5%
0.0%
Cash & Balance with Banks/FIs Investments
Leases Loans
2013 2014 2015 2016 2017 2018 2019 2020
All other assets

Source: Department of Financial Institutions and Markets, Bangladesh Bank.

63
December basis Assets and June basis GDP figures have been used for the calculation of total Asset to GDP ratio.

78 Financial Stability Report 2020

 TABLE 5.1: FIS' SECTOR-WISE LOANS AND LEASES AS OF END DECEMBER 2020
Amount (in
SL Major sectors Percent HHI*
billion BDT)
1 Trade and Commerce 92.2 13.6% 185.6
2 Industry:
A) Garments and Knitwear 40.4 6.0% 35.5
B) Textile 31.3 4.6% 21.3
C) Jute and Jute-Products 3.4 0.5% 0.3
D) Food Production and Processing 28.7 4.2% 17.9
E) Plastic Industry
Industry 7.0 1.0% 1.1
F) Leather and Leather-Goods 2.7 0.4% 0.2
G) Iron, Steel and Engineering 32.8 4.8% 23.5
H) Pharmaceuticals and Chemicals 16.9 2.5% 6.2
I) Cement and Allied Industry 16.6 2.4% 6.0
J) Telecommunication and IT 12.0 1.8% 3.2
K) Paper, Printing, and Packaging 11.4 1.7% 2.9
L) Glass, Glassware and Ceramic Industry 7.0 1.0% 1.1
M) Ship Manufacturing Industry 4.5 0.7% 0.4
N) Electronics and Electrical Products 9.0 1.3% 1.8
O) Power, Gas, Water, and Sanitary 71.4 10.5% 111.2
P) Transport and Aviation
Service 26.4 3.9% 15.2
3 Agriculture 16.8 2.5% 6.2
4 Housing 128.0 18.9% 357.7
5 Others
A) Merchant Banking 21.8 3.2% 10.3
B) Margin Loan 8.0 1.2% 1.4
C) Others 88.8 13.1% 171.8
TOTAL 677.1 100.0% 980.6
* Herfindahl-Hirschman Index (HHI).
Source: Department of Financial Institutions and Markets, Bangladesh Bank .

The Herfindahl-Hirschman Index (HHI) indicates that FIs’ loans and leases were competitive64
during CY20. The aggregate value of the index as shown in Table 5.1 was 981 at the end of
December 2020 while it was 963 in 2019. FIs’ loans and leases were concentrated in the two
major sectors namely the housing sector and trade and commerce sector, which accounts for
18.9 percent and 13.6 percent of total loans and leases respectively.
5.1.3 LIABILITY-ASSET RATIO
The liability-asset ratio reached 89.9 percent at end-CY20, 3.5 percentage points higher than
86.4 percent recorded in CY19. The liability-asset ratio of the FIs is considerably high,
indicating the lesser contribution of equity.

64
HHI lying below 1500 points indicates ‘competitive’ concentration revealing that the sectors are fairly treated in
terms of credit distribution by the FIs and no significant monopolistic distribution is evident.

Financial Stability Report 2020 79

 CHART 5.4: LIABILITY-ASSET RATIO OF FI INDUSTRY
1000 100%

800 80%
Amount in Billion BDT

Liability-Asset ratio
600 60%

400 40%

200 20%

0 0%
2013 2014 2015 2016 2017 2018 2019 2020
Liability Assets Liability-Asset Ratio

Source: Department of Financial Institutions and Markets, Bangladesh Bank.

5.1.4 ASSET QUALITY

Asset quality of the FIs has weakened in CY20 as the total non-performing loans and leases rose
to BDT 100.5 billion from BDT 64.0 billion in CY19. Eventually, the ratio of non-performing loans
and leases to total loans and leases jumped from 9.5 percent in CY19 to 15.0 percent in CY20.
Such marked rise in NPL ratio has largely been resulted due to the regulatory reviews and
adjustments on some of the FIs’ loan portfolios. Nine (09) FIs had their NPL ratio higher than 15
percent; 12 FIs had the ratio over 10 percent while 15 FIs were able to maintain their NPL ratio
below 5 percent. During CY20, the loan loss provisions amounting to BDT 44.4 billion was
maintained by FIs against a requirement of BDT 51.8 billion, representing a coverage ratio of
44.12 percent of total non-performing loans and leases, 7.6 percentage points higher than the
coverage ratio registered in CY19. 6 FIs, out of 34, could not maintain the required provision,
which eventually led to a provision shortfall of BDT 7.4 billion for the industry. The shortfall was
BDT 9.4 billion at end-December 2019.

CHART 5.5: FIs’ CLASSIFIED LOANS AND LEASES CHART 5.6: FIs’ LOAN LOSS PROVISIONING

16.0 15.0
15.0 60.0
51.8
14.0
50.0 44.4
13.0
BDT in Billion

12.0 40.0 32.8

33.28
11.0 30.0 25.2
27.54
9.5 24.6 23.4
Percent

10.0 8.9 19.8 19.8 19.7

7.94 20.0 14.2
9.0 11.0
7.3 7.3 7.7 8.6 9.5 10.0
8.0 10.0 6.9
7.0 5.6
5.5 5.3 0.0
6.0
CY12 CY13 CY14 CY15 CY16 CY 17 CY 18 CY 19 CY20
5.0
4.0
2012 2013 2014 2015 2016 2017 2018 2019 2020 Loan loss provisions (required) Loan loss provisions (maintained)

Classified Loans & Leases to Total Loans & Leases

Source: Department of Financial Institutions and Markets, Bangladesh Bank.

5.1.5 PROFITABILITY
Due to high NPLs, the overall profitability of the FIs as of December 2020 was largely affected
as compared to that of 2019. In CY20, profit before taxes was amounting to BDT 8.8 billion; a
notable decline of 38 percent compared with that of BDT 14.1 billion in CY1965. This decrease
65
Some data of the previous year were reviewed by DFIM.

80 Financial Stability Report 2020

can be attributable to a 38 percent (equivalent to BDT 9.72 billion) decline in net interest
income in CY20, although there was a 252 percent increase in investment income in this
calender year. At the same time, other operating income decreased by 15 percent, and
maintained loan loss provisions increased by 89 percent compared with those of the previous
year. Profit after tax amounted to BDT 3.56 billion in CY20, substantially lower than that of BDT
9.05 billion in CY19. Consequently, the key profitability measures such as return on assets
(ROA) and return on equity (ROE) declined sharply from the preceding year. The ROA and the
ROE were 0.4 percent and 3.9 percent respectively at end-December 2020.

CHART 5.7: FIs’ TREND OF INCOME AND EXPENSE CHART 5.8: FIs’ PROFITABILITY TREND
90.0
12.0
80.0
70.0
10.0 10.2 9.9
60.0 9.8
Billion in BDT

9.2
50.0
8.0 8.3
40.0 7.45 7.6

In percent
30.0
6.0
20.0
10.0 4.7
4.0 3.9
-
ge
era
Brok 2.0 1.9 1.8 1.8 1.6
e& 1.1
ang 0.7 0.98 1.04
xch 0.4
,E 0.0
on
ssi 2012 2013 2014 2015 2016 2017 2018 2019 2020
mi
Co

CY14 CY15 CY16 CY17 CY18 CY19 CY20 ROA (%) ROE (%)

Source: Department of Financial Institutions and Markets, Bangladesh Bank.

5.2 CAPITAL ADEQUACY

The minimum capital adequacy ratio (CAR) for the FIs is 10 percent as per the Basel II standard.
The CAR of the FIs was 14.2 percent at end-December 2020 (provisional), moderately lower as
compared to 17.5 percent recorded at end-December 2019. Yet, the industry’s CAR remains
higher than the required threshold level.
Chart 5.9: FIs’ CAPITAL ADEQUACY RATIO (CAR)
25.0
21.2
20.0
18.3 18.7
CAR (in percent)

16.6 17.5
15.0 14.2
13.5 13.93

10.0

5.0

0.0
2013

2014

2015

2016

2017

2018

2019

2020

Source: Department of Financial Institutions and Markets, Bangladesh Bank.

5.3 LIQUIDITY
The extents of CRR and SLR maintained by the FIs are considered as key indicators of liquidity
in the industry. Chart 5.10 illustrates that the maintenance of CRR and SLR had been increasing
throughout the 2016-2019 period. At end-December 2019, the FIs sector maintained a 2.5
percent of CRR and 29.3 percent of SLR. However, they declined to 1.6 percent and 21.6 percent
respectively at end-December 2020 but remained in the comfort zone66.
66
The minimum requirements for CRR and SLR are 1 percent and 5 percent respectively (vide DFIM circular no. 03/2020).

Financial Stability Report 2020 81

 CHART 5.10: FIs’ CRR AND SLR

30.0

20.0
In percent

10.0

0.0
end Dec- end Dec- end Dec- end Dec- end Dec end Dec end Dec end Dec
2013 2014 2015 2016 2017 2018 2019 2020

Maintained CRR Maintained SLR

Source: Department of Financial Institutions and Markets, Bangladesh Bank.

Overall analysis shows that the borrowing of FIs markedly increased in CY20 compared to
CY19 whereas the size of equity declined. Deposit increased marginally during this period.
Besides, the loans slightly decreased by 3 percent while the lease financing and investments
have increased by 21 percent and 15 percent respectively from the previous year. As the NPL
ratio has increased, the loan-loss provisioning also increased substantially, which led the
profitability of the FIs to a decline in CY20 as compared to CY19. It may seem to be a matter of
concern from the stability point of view. The overall CAR of FIs remained adequate as per
regulatory standards despite the subdued status of some FIs which need meticulous
attention. The liquidity position of the FIs also appeared to be quite stable during the period
under review. Bangladesh Bank, nevertheless, remains vigilant in continuous monitoring of
the performance of the FIs and undertakes necessary regulatory measures to minimize the
risks, improve the financial conditions, and strengthen good governance in the industry by
using its prudence and timely guidance.

82 Financial Stability Report 2020

Chapter 6
MONEY AND CAPITAL MARKET
The money and capital market of Bangladesh experienced a two-phased growth trajectory during
CY20. In the first phase, up to August 2020, moderate liquidity state was observed amid the
pandemic. During this time, the money market was largely stable through remaining watchful
and aligning with the central bank policies. However, the capital market remained relatively
bearish during the first quarter and stable from April to August 2020. At the later stage, from
September to December 2020, the money and capital market experienced a liquidity glut. During
this time, call money rate, interbank repo rate, and treasury yield curve dropped sharply and there
was little dependence on the central bank's intervention. Alongside, the capital market
experienced a higher turnover with upward trend of index and market capitalization. Primarily,
BB’s expansionary monetary policy and proactive liquidity management during the pandemic
helped the markets to turnaround a quicker recovery.

6.1 MONEY MARKET

In 2020, the primary issuance of government treasury bills of different maturities was BDT
1220.00 billion in aggregate. However, there was no instance of the use of BB Bill in 202067.
Issuance of T-bills in 2020 comprised of 46 percent of 91-days T-bill, 28 percent of 182-days
T-bills, and 24 percent of 364-days T-bills.
Chart 6.1 exhibits the month-wise issuance of primary T-bills for each maturity during 2020.
T-bills worth of BDT 20.0 billion, BDT 565.0 billion, BDT 341.0 billion, and BDT 294.0 billion with
maturities of 14, 91, 182, and 364 days respectively were issued throughout the year. No
issuance of T-bill was observed in the month of April-2020 whereas May-2020 observed the
highest issuance of T-bills amounting to BDT 162 billion. A random pattern was observed in
the volume of T-bill issuance suggesting that the Government’s demand for funds did not
follow any cyclical or seasonal pattern in 2020.

CHART 6.1: VOLUME OF T-BILLS ISSUANCE IN 2020

100.00

80.00
In billion BDT

60.00

40.00

20.00

0.00
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20

14D T-Bill 91D T-Bill 182D T-Bill 364D T-Bill

Source: BB Website, Economic Data; Calculation: FSD, BB.

67
07 and 14-day BB bills were introduced in April 2016 mainly for sterilization purpose. (DMD Circular No. 03, dated
05 April 2016).

Financial Stability Report 2020 83

6.1.1 REPO WITH BANGLADESH BANK
Repo and LSF from Bangladesh Bank were availed to a sizable extent during CY20.
On the verge of expected liquidity tightening in March 2020 due to the COVID-19 pandemic,
Bangladesh Bank proactively managed the liquidity situation of the financial system68.
Consequently, banks and financial institutions (FIs) availed Repo facility worth BDT 2813.0
billion and special repo worth BDT 101.0 billion from BB in the review year. The month-wise repo
volume in Chart 6.2 depicts that the money market had a noticeable dependency on the central
bank for liquidity till August 2020 while it was highest in March 2020. Moreover, during March
and April 2020, special repo was also availed by the banks and NBFIs in addition to the repo.

CHART 6.2: MONTHLY TURNOVER OF REPO, SPECIAL REPO,LSF, Besides, BB also provides a
AND REVERSE REPO IN 2020 substantial amount of liquidity
900.0
support facility (LSF) to the
800.0 financial institutions, particularly
700.0 during the first quarter of 2020.
600.0 Downward trend of both
BDT in billion

500.0
interbank repo rate and call
400.0
300.0
money rate supported by the
200.0 easing of liquidity condition of
100.0 the market explain much of the
0.0 reason behind the declining
demands for repo, special repo
and LSF after August 2020 as
Repo Special Repo Reverse Repo LSF
shown in Chart 6.2.
Source: DMD & BB Website.

6.1.2 INTERBANK REPO

Interbank Repo rate drastically declined after August 2020 whereas repo volume
moderately increased in September 2020 and stayed almost at the same level for the
remaining period of 202069.

CHART 6.3: INTERBANK REPO TURNOVER AND INTER BANK The volume of interbank repo
REPO RATE IN 2020 transactions in 2020 was BDT 7359.4
1000.0 7 billion. The month-wise interbank repo
800.0
6 volume, illustrated in Chart 6.3, shows
5
the market was slowed down during
In Percent
In Billion BDT

600.0 4
400.0 3 the months of April-May 2020, which
200.0
2 could be partially attributed to
1
0.0 0
COVID-19. Moreover, the interbank
repo rate also experienced moderate
fluctuations throughout the first two
Interbank Repo Volume Monthly Weighted Average Rate quarters of the year followed by a
noticeable declining wave and reached
Source: BB Website, Economic Data; calculation: FSD, BB.
at 0.75 percent in December 2020.

68
Repo rate was set to 5.75 percent from 6 percent on 23 March 2020 vide MPD Circular No.02, 5.25 percent from
5.75 percent on 09 April vide MPD Circular No.04, 2020 and 4.75 percent from 5.25 percent on 29 July, 2020 vide
MPD Circular No.05.
69
Monthly weighted average interbank repo rate.

84 Financial Stability Report 2020

6.1.3 INTERBANK CALL MONEY AND INTERBANK DEPOSIT MARKET70
The call money rate was reasonably stable till August 2020 with a gradual slow down since
September 2020.
Chart 6.4 shows the month-wise call money borrowing volume along with the average call
money rate. It shows that call money borrowing volume was lowest in March-2020 when
COVID-19 first hit the country. However, the call money rate hovered around 5 percent at that
time. After that, from April to August 2020, the volume remained high with almost the same
rate.

CHART 6.4: CALL BORROWING VOLUME AND MONTHLY WEIGHTED Finally, from September 2020,
AVERAGE CALL MONEY RATE IN 2020 the call money rate continued to
2000 6.00 fall sharply with a relatively
1800 lower amount of borrowing. In
Call Money Volume (BDT in billion)

5.00
December 2020, the call money

Call Money Rate (in percent)

1600
1400
4.00 rate stood at 1.8 percent.
1200
1000 3.00
Indeed, BB has injected enough
800 liquidity earlier in the market to
600
2.00 tackle COVID-19 shocks due to
400
1.00 which demand for funds in the
200
call money market at the later
0 0.00
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 part of the year remained slim
and hence, the rate fell sharply.
Source: DMD and BB Website.

6.2 BOND MARKET

A dynamic and active bond market is crucial for the better supplement as well as
management of banks’ liquidity, government debt, and monetary policy. Besides, a vibrant
bond market strengthens financial stability by effectively tackling the maturity mismatch
problem of bank-based financing. In Bangladesh, the bond market is primarily dominated by
government bonds with low product variations while the activities are mostly based on the
primary auction.
In 2020, treasury bonds (T-Bond) worth TABLE 6.1: VOLUME OF T-BONDS AUCTION SALES IN 2020
BDT 860.5 billion were issued. Table 6.1
Volume % of Total
presents the volume of treasury bonds Tenure
(BDT in Billion) Auction Sales
sold in 2020 for different maturities. The 2Y T -Bonds 257.0 29.9%
table demonstrates the higher auction 5Y T -Bonds 245.0 28.5%
sales for bonds with shorter maturity in 10Y T -Bonds 220.0 25.6%
the review year. Issuances of 2-year 15Y T -Bonds 66.5 7.7%
20Y T -Bonds 72.0 8.4%
Treasury bonds were highest in 2020 as
Total 860.5 100%
they captured 30 percent of the total
Source: BB Website.
auction sales. Treasury bond issuance
was lowest (BDT 28 billion) in March
2020 whereas it was highest (BDT 100
billion) in July 2020.

70
Interbank call money only includes exposures of scheduled banks and FIs with each other. Assets or liabilities with non-
scheduled financial institutions are excluded from this discussion.

Financial Stability Report 2020 85

Chart 6.5 exhibits the mandatory devolvement of treasury securities in auction sales during
the review year. Mainly, devolvement took place on Bangladesh Bank in 2020 except for one
instance in October 2020 where it was on PDs.

CHART 6.5: VOLUME OF TREASURY SECURITIES

Higher devolvement was
AUCTION SALES – MANDATORY DEVOLVEMENT, 2020 mainly observed in March,
80.00
May, and June whereas no
70.00 devolvement was observed
60.00 during April, September, and
In billion BDT

50.00
40.00
December in the review year.
30.00 Usually, heavy government
20.00 demands before the end of
10.00
0.00
fiscal year pull up the
Treasury securities rate and,
therefore, higher
BB PD Non-PD
devolvement took place to
Source: BB Website, Treasury Bills/Bonds Auctions. Calculation: FSD, BB.
rationalize that.

CHART 6.6: MONTHLY VOLUME OF SECONDARY TRADE Chart 6.6 depicts that the
160.0
monthly volume of secondary
140.0 trade increased momentarily in
120.0 2020 as compared to 2019. The
In Billion BDT

100.0 secondary market for T-bonds

80.0
was more active in 2020 than in
60.0
40.0
2019. Trading volume across
20.0 months, however, exhibited
0.0 almost similar pattern in both
calendar years as more trade
2019 2020
took place in the second half of
Source: BB Website, Data of Treasury Bills & Bonds. the years.

Also, likewise 2019, December in 2020 observed the highest secondary trading volume.
Mainly, the Over-the-Counter (OTC) mechanism of Market Infrastructure (MI) module (an
automated auction and trading platform for the government securities) was used for
secondary trading. The volume of secondary trade using the Trader Work Station (TWS)
mechanism was insignificant.

86 Financial Stability Report 2020

 BOX 6.1: YIELD CURVE
The treasury auction yields in December 2020 were considerably lower for all maturities compared to
those of December 2019 and June 2020. Consequently, the treasury auction yield curve in December
2020 went down both in the short-and long-term compared to those of December 2019 and June 2020
yield curves. This downward yield curve reflects the lower cost of government borrowing. Moreover,
short-term yield declined more than the long-term yield, which made the yield curve steeper indicating
a higher maturity risk premium.
Chart B6.1.1 Treasury Bill Yield Curve Chart B6.1.2 Treasury Bond Yield Curve
9.00 10.00
9.00
8.00
8.00
7.00
7.00
6.00

In percent
6.00
In percent

5.00
5.00
4.00 4.00
3.00 3.00
2.00 2.00
1.00 1.00
0.00 0.00
0.25 0.5 0.75 1 2 5 8 11 14 17 20
Maturity (In Year) Maturity (In Year)
Dec-19 Jun-20 Dec-20 Dec-19 Jun-20 Dec-20

Source: Major Economic Indicators, January 2021 Issue, BB.

Usually, a steeper yield curve indicates stronger economic activities and higher expected inflation.
However, in the absence of a vibrant secondary bond market, such indication from the primary market
yield curve may not be reasonably conceivable.

6.3 CAPITAL MARKET

The capital market in Bangladesh was bullish in CY20 as has been evident from movements in
major market indicators such as index value, market capitalization, daily average turnover,
increase in capital, and P/E ratio in the Dhaka Stock Exchange (DSE)-the prime bourse in Bangla-
desh. Despite the effect of COVID-19, expansionary monetary policy, Government’s stimulus
packages, prudent management of pandemic, and BSEC’s strategies have helped the market to
remain buoyant.
The DSE Broad Index (DSEX) increased by 21.3 percent in 2020. The market capitalization of DSE
increased by 32.0 percent. The daily average turnover increased to BDT 6.5 billion in 2020 from
BDT 4.5 billion in 2019. Moreover, capital raised from the market during 2020 through IPO, right
share and stock dividends increased by BDT 80.1 billion in CY20 which was considerably higher
than the BDT 49.5 billion of the previous year.

6.3.1 MAJOR INDEX AND MARKET CAPITALIZATION

Chart 6.7 shows that after the slight initial increase in February 2020, DSEX nosedived in
March 2020 mainly due to uncertainty arising from the COVID-19 pandemic. After
reopening71, DSEX remained at a low level till August 2020 as investors remained cautious in
their investment decisions. After that, DSEX got momentum and reached to 5402.07 at the
end-December 2020, and thereby, gained 949.1 index points during this year. The market
capitalization of DSE followed similar movements during the review year and reached BDT
4,482.3 billion at the end of 2020 from BDT 3,395.5 billion of end-2019. The rising index
71
DSE remained closed from March 25, 2020 to May 30, 2020 due to general holydays declared by the government
to fight off the Covid-19 pandemic.

Financial Stability Report 2020 87

coupled with the increased market capitalization indicates the bullish capital market during
the review year.
Chart 6.8 exhibits the candlestick chart for the DSEX Index which reveals the investors’
sentiments and behaviors from the different patterns of the opening index, highest index,
lowest index, and closing index. Long green candle in 2020 is indicating investors’ bullish
sentiment about the market. Notably, the gap between the highest and lowest value of DSEX
was maximum in 2020 since its inception in 2013.
CHART 6.7: DSEX INDEX AND MARKET CAPITALIZATION IN 2020 CHART 6.8: DSEX (CY-2013 TO CY-2020)
6000 6000

Market capitalization (in BDT billion)

7000
5500 5500 6500
5000 5000
6000
4500 4500
5500

DSEX Index
DSEX

4000 4000
5000
3500 3500
3000 3000 4500

2500 2500 4000

2000 2000 3500
1-Mar-20

1-May-20
1-Jan-20

1-Jun-20

1-Nov-20
1-Dec-20
1-Jul-20

1-Oct-20
1-Feb-20

1-Apr-20

1-Sep-20
1-Aug-20

3000

2013

2014

2015

2016

2017

2018

2019

2020
DSEX Market Cap. in Billion Taka

Source: DSE.

CHART 6.9: MARKET CAPITALIZATION TO GDP RATIO

Total market capitalization as a percentage
of GDP is a vital indicator that indicates the
30% extent of deepening of a country’s capital
28% 28% market. Chart 6.9 shows that the market
26%
25% capitalization-to-GDP ratio is gradually
24%
22%
declining which refers to the diminishing
21%
20% contribution of the capital market towards
19%
18% 18% the economic growth in Bangladesh.
17% 16% 16%
16% Further, in the review year, the sharp
14% decline of market capitalization to GDP
12% 12% ratio from 16 percent in June 2019 to 12
10% percent in June 2020 was largely owing to
the pandemic effect. However, the
year-end (CY20) market capitalization to
GDP ratio seems to be optimistic. More
Source: DSE Monthly Review, December 2020. high-quality stocks should be promoted
* The GDP of FY 2019-20 is considered for the calculation of the and listed to provide additional depth into
market capitalization ratio in December 2020. this market so that it could not only
facilitate the long-term financing demand
but also ensure a strong footing for the
financial stability of Bangladesh.

6.3.2 DAILY AVERAGE TURNOVER

Capital market liquidity is another important factor as investors prefer higher liquidity in the
market. Chart 6.10 shows the trend in daily average turnover since 2013. It exhibits that the
daily average turnover increased to BDT 6.5 billion in 2020 from 4.8 billion in 2019 reflecting a

88 Financial Stability Report 2020

significant increase in liquidity into the market. Further, Chart 6.11 shows the month-wise
liquidity condition of the DSE during the pandemic-hit 2020. It depicts the dire condition of
market liquidity persisted from April to July 2020, i.e., during the early COVID-19 period in the
country. However, after the initial panic of the pandemic, the month-wise daily average
turnover was increasing from August to December 2020.
CHART 6.10: YEAR-WISE DAILY AVERAGE TURNOVER CHART 6.11: MONTH-WISE DAILY AVERAGE TURNOVER OF 2020
10.0 12.0
8.7 10.3
9.0 9.8 10.1
8.0 10.0
8.5
7.0 6.5 7.9
5.5 8.0
Billion BDT

6.0

Billion BDT
5.0 4.9 4.8 6.2
5.0 4.0 4.2 6.0
4.0
3.7 3.7
3.0 4.0 2.9
2.0 2.2
2.0 1.4
1.0
0.0 0.0
2013 2014 2015 2016 2017 2018 2019 2020

Source: DSE.

6.3.3 MARKET CAPITALIZATION DECOMPOSITION

Charts 6.12 and 6.13 demonstrate the sectoral share in market capitalization in 2019 and 2020
respectively. The usual dominance of the manufacturing sector in the market capitalization
has been further enhanced in 2020 capturing 42.6 percent share from 37.7 percent in 2019.
The key reasons for such an increase were the strong growth in market capitalization of
pharmaceuticals and chemicals, engineering, food, and allied, textile and cement industries.
Shares of service and miscellaneous sectors slightly decreased, though the same retained the
second largest market share. The market share of this sector decreased to 33.9 percent in 2020
from 34.1 percent in 2019. Despite a decline in the share of market capitalization,
telecommunication, fuel and power, mutual funds and miscellaneous industry of “service and
miscellaneous” sectors experienced considerable growth in market capitalization in 2020.
Moreover, the contribution of the financial sector in total market capitalization decreased
markedly in 2020 as it stood at 23.4 percent in 2020 from 28.0 percent from 2019. However,
banks, financial institutions, and the insurance industry have experienced positive growths in
their respective market capitalization.

CHART 6.12: DECOMPOSITION OF MCAP (DEC- 2019) CHART 6.13: DECOMPOSITION OF MCAP (DEC- 2020)
Corporate Corporate
Bond, 0.1% Bond, 0.1%

Financial Financial
Service and Sector, 23.4%
Misc., 34.1% Sector, 28.0% Service and
Misc., 33.9%

Manufacturing,
Manufacturing, 42.6%
37.7%

Source: DSE.

Financial Stability Report 2020 89

6.3.4 PRICE-EARNINGS (P/E) RATIO
The overall weighted average price-earnings (P/E)72 ratio of the DSE, since June-2012, was the
lowest (10.60) in March 2020, when COVID-19 initially hit the country.

CHART 6.14: MARKET PRICE EARNINGS RATIO However, within a very short time, the
market P/E took a reverse turn and
20.0
reached 16.5 in December 2020. This
18.0
quick turnaround in market P/E ratio
16.0 might suggest that investors’ initial
14.0 panic about the pandemic was subsided
12.0 and they were rather optimistic about
10.0 the future growth of the listed
8.0 companies. However, investors and
Jun-14

Jun-15

Jun-16

Jun-17
Jun-12
Dec-12
Jun-13
Dec-13

Dec-14

Dec-15

Dec-16

Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Dec-20
other stakeholders need to be
meticulous about any irrational
P/E Ratio June-12 to Dec-19 P/E Ratio 2020
exuberance as the market P/E ratio in
Average P/E Ratio during June-12 to Dec-20
2020 lies above the long-run average of
Source: DSE.
P/E ratio.

6.3.5 INITIAL PUBLIC OFFERING (IPO), RIGHT SHARE AND BONUS SHARE
CHART 6.15: CAPITAL INCREASED BY THE
An increase in initial public offerings
SECURITIES TRADED AT DSE (IPOs) deepens the stock market
through increasing market
100 capitalization. Chart 6.15 shows the
trend in the increase in capital resulting
80
from IPOs, right shares, and bonus
In Billion BDT

60 shares. In the review year, the capital

40
increase was largely driven by an
increased volume of IPOs. Overall, the
20 capital increased by BDT 80.1 billion in
0
CY20 which was considerably higher
2015 2016 2017 2018 2019 2020 than the previous year amounting to
BDT 49.5 billion.
IPO Right Bonus Total

Source: DSE Monthly Review, December 2020.

6.3.6 DIVIDEND AND YIELD

Table 6.2 shows the number of companies that declared cash dividends was increased to 237
in CY20 from 213 in CY19. On the other hand, the number of companies which declared stock
dividend was declined to 94 in CY20 from 132 in the previous year. Also, the number of
companies that did not declare any dividend was increased to 46 in CY20 from 29 in CY19.

72
The current market price of the stock divided by its earnings per share (EPS) is known as the price-earnings (P/E)
ratio which shows how much investors are paying for each unit of earnings.

90 Financial Stability Report 2020

TABLE 6.2: COMPARISON OF DIVIDEND AND YIELD (2017-2020)
Particulars 2017 2018 2019 2020
No. of companies declared cash dividend 187 179 213 237
No. of companies declared stock dividend 142 154 132 94
No. of companies which did not declare any dividend 36 28 29 46
Yield (%) 3.25 3.58 5.03 3.16
Source: DSE Monthly Review, December 2020.

Dividend yield decreased to 3.16 percent from 5.03 percent in CY19. Since dividend yield is one
of the important indicators of returns for the investors, regular dividend payment by the
companies is crucial for attracting investors and attaining a sound capital market. However, the
dividend yield in the stock market is lower than the returns of other alternative investments, for
example, the rate of Sanchayapatra or the fixed deposit rate of banks and NBFIs.

6.3.7 INTERLINK BETWEEN BANKING SECTOR AND STOCK MARKET

The linkage between the banking sector and the stock market is crucial from the financial
stability viewpoint. Chart 6.16 shows how banks and capital markets are inter-linked.
Inter-linkages may arise from the banks’ investment in the capital market on a solo (only bank)
as well as the consolidated basis (i.e., banks along with their subsidiaries). Banks’ solo-basis
investment in the capital market constitutes their investment in shares, mutual funds,
bonds/debentures, and placements. Additionally, loans to own subsidiaries in the capital
market, loans to others for merchant banking and brokerage activities, loans to stock dealers
are also considered as banks’ solo-basis investment exposures. For consolidated exposure,
investment in shares, mutual funds, bonds/debentures, placement shares, and margin/bridge
loans by subsidiary companies of the bank are taken into account.
CHART 6.16: SCHEMATIC VIEW OF INTER-LINKAGE BETWEEN BANKS AND CAPITAL MARKET

Banks
Loan To own Loan To Other
Subsidiaries Brokers, Dealers

Investment Dividend Income,

Captal Gain
Equity Price Risk

Bank Subsidiaries Stock Market Other Stock Market Participants

(Secyrutues Ltd., (Stock Dealers & Brokers)
Investment Ltd.) (DSE, CSE)

Individual
Margin Loans Investors Margin Loans

Loan To Other
Brokers, Dealers

Dividend Income,
Investment Captal Gain
Equity Price Risk

Source: QFSAR Issue -18, FSD, BB.

Generally, dividend, interest income, and capital gain are the main earnings of the banks from
such investment at the cost of bearing equity price risk. So, the performance of the capital
market may have a considerable impact on the banks as banks may incur losses from their
investment exposures and the risk is higher for higher exposure in the capital market.

Financial Stability Report 2020 91

Charts 6.17 and 6.18 show that during the review year, banks’ capital market exposures (both
solo and consolidated) slightly increased except June 2020 quarter. However, the capital
market exposure of banks remained well below the regulatory limit73 which indicates that
equity price shock may not pose any major stability threat to the banking sector in the
near-term.
CHART 6.17: TREND IN CAPITAL MARKET EXPOSURES CHART 6.18: TREND IN CAPITAL MARKET EXPOSURES
(SOLO) OF BANKS (CONSOLIDATED) OF BANKS
30.0% 60.0%

25.0% 50.0%
40.0%
20.0% 16.8% 16.7% 28.1% 27.5%
24.7% 23.0%
14.4% 13.6% 13.4% 13.8%
30.0% 21.7% 22.9% 20.7% 22.8% 24.0%
15.0% 12.0% 12.8% 11.4% 20.0%
10.0% 10.0%

5.0% 0.0%

Feb-19
Dec-18

Feb-20
Apr-19

Jun-19

Aug-19

Oct-19

Dec-19

Apr-20

Jun-20

Aug-20

Oct-20

Dec-20
0.0%

CM Exposure (Consolidated)

CM Exposure (Solo) Maximum Limit 25% (Solo Basis) Maximum Limit 50% (Consolidated Basis)

Source: DOS.

There is another perspective of this inter-linkage. As most private commercial banks (PCBs)
are listed in the DSE and the banking sector comprises one of the largest segments in this
market, the performance of those listed banks (for instance, measured by CRAR, NPL, ROA, or
ROE) may significantly influence the overall outcome (e.g., index, market capitalization) of the
capital market through their share price channel. Chart 6.19 shows the market capitalization
of four major sectors in DSE over the last five years.
The chart 6.19 depicts that the
CHART 6.19: MAJOR SECTORS’ MARKET CAPITALIZATION IN DSE
banking sector held the highest
25.0% market capitalization from 2016 to
2019 reflecting the dominance of
20.0%
the banking sector in DSE.
15.0% However, the share declined to
14.5 percent of market
10.0%
capitalization in 2020 as the
5.0%
telecommunication sector took the
highest share in this calender year.
0.0% Still, the higher share of the
2016 2017 2018 2019 2020
banking sector in the stock market
Bank Pharmaceuticals and Chemicals elucidates that any stress on the
Telecommunication Fuels and Power banking sector may adversely
Source: DSE Monthly Review, December 2020.
affect the market through a
contagion effect. Both market
capitalization and index may fall
sharply due to the fall in the bank's
share price.

73
The maximum allowable limit to investment in the capital market is 25 percent and 50 percent of the prescribed
capital (sum of paid-up capital, statutory reserve, retained earnings and share premium) on solo and
consolidated basis respectively.

92 Financial Stability Report 2020

Chapter 7
FINANCIAL INFRASTRUCTURE
Financial infrastructure facilitates effective operation of financial intermediaries. It promotes
financial market’s growth as well as boost up fair competition, which leads to efficient
allocation of funds and creates more options for customers to diversify their portfolio in a
judicious manner. In such a way, the financial infrastructure acts to improve the efficiency of
the financial system and protect the rights of both investors and creditors, and thereby
promotes financial stability. As a regulator of the financial system of Bangladesh, Bangladesh
Bank has been working relentlessly for introducing state-of-the-art payment platforms and
instruments to avoid any domestic or cross border risk that may lead to systemic shock to the
financial system. Modern financial infrastructure is heavily technology based. To foster
smooth functioning of the financial markets, BB has established several sophisticated
payment system platforms with innovative technologies consistent with the global standards.
BB is also enhancing its supervision for the smooth functioning of financial infrastructure
through formulation of effective regulations and ensuring compliance culture among
concerned stakeholders.

7.1 ELECTRONIC BANKING OPERATIONS

Banks are the pioneer in introducing digitalization services in banking system of Bangladesh.
This digitalization approach has considerably enabled banks to reach customers in numerous
ways and cater for banking services at ease. The banking industry in Bangladesh has gone
through massive transformation from manual to electronic banking for the last two decades.
Both depth and breadth of the banking industry have widened manifold through this
transformation. Indeed, banks have automated their branch network, developed corporate
intranet system, digitized internal communication, and introduced Core Banking System
(CBS) to deliver internet banking, online banking and e-payment gateway and also have
smoothened transaction process by using electronic payment and settlement systems that
eventually helped to increase country’s economic activities to a greater extent.
At the end of CY20, 99.10 percent of the bank branches of SOCBs and 99.65 percent of bank
branches of PCBs have extended their online banking coverage (Table 7.1). The online
coverage of SBs has also increased significantly and stood at 78.33 percent at end-CY20,
which was only 30.89 percent at end-CY19. The FCBs has brought 100 percent of their
branches under online coverage. Presumably, massive transformation from manual to online
banking solution has implication for enhancing productivity and efficiency of the banking
industry. In the last year, 90 percent of total bank branches provided online banking services,
which reached to 96.28 percent at the end of CY20. This progressive development suggests
that 100 percent of bank branches are going to be online in the near future. This will be a great
milestone for the banking industry as this may be able to ensure faster banking services to
meet the demand of today’s digital society.
During the review period, BDT 814.56 billion of fund has been transacted through internet
banking platforms which was 29 percent higher than that of the preceding year.

Financial Stability Report 2020 93

 TABLE 7.1: ONLINE BANKING SCENARIO As of December, 2020
Type of No. of No. of Total No. of Branches with Percent of Online
Bank ATMs Branches Online Coverage Branches
SOCBs 261 3,793 3,721 98.10%
SDBs 6 1,421 1,113 78.33%
PCBs 8,563 5,442 5,423 99.65%
FCBs 137 66 66 100.00%
Total 8,967 10.722 10,323 96.28%
Source: Sustainable Finance Department, BB.

Chart 7.1 illustrates that both

CHART 7.1: TOTAL VOLUME OF ELECTRONIC BANKING TRANSACTION
ATMs and debit card have
much higher and almost
2,000 similar level of transaction
volume, compared to credit
1,500 card and internet banking. In
In Billion BDT

fact, most of the ATM

1,000
transactions are operated
500
through debit card, only a
very small portion of ATM
- withdrawal is done through
ATM Debit Card Credit Card Internet credit card. Other prominent
Banking
uses of debit and credit card
CY 2016 CY 2017 CY 2018 CY 2019 CY 2020 are for payment by POS
Source: Payment Systems Department (PSD), BB.
machine and online banking.
It is mentionable that all the
platforms of electronic banking have recorded a mild growth except credit card. In case of
credit card, transaction volume decreased by 25 percent in CY20 than that of CY19.

7.2 NATIONAL PAYMENT SWITCH BANGLADESH (NPSB)

In December 2012, Bangladesh Bank introduced NPSB to facilitate interbank electronic
payments originating from different channels like Automated Teller Machines (ATM), Point of
Sales (POS) and Internet Banking Fund Transfer (IBFT). Currently 53 banks are connected to
NPSB for their ATM transactions, while 52 banks are connected to settle their POS transactions
through NPSB. Moreover, Internet Banking Fund Transfer service through NPSB was started in
November 2017 where 25 banks are now connected. Recently, Bangladesh Bank has
introduced uniform QR specifications termed as ‘Bangla QR’ to promote QR code-based
payments through NPSB as a safety measure against cyber threat. The number and volume of
the interbank ATM, POS, and Internet Banking Fund Transfer transactions through NPSB has
been growing gradually.
Approximately 33.33 million transactions amounting BDT 309.08 billion had been settled
through NPSB in CY20 recording a growth of 12.46 percent and 15.81 percent in the
number of transactions and amount of payments respectively.

94 Financial Stability Report 2020

7.3 BANGLADESH AUTOMATED CLEARING HOUSE (BACH)
BACH is the first major milestone of BB towards digitalizing the payments landscape of the
country. It is an automated inter-bank clearing facility for retail payments that clears both
paper and instruction-based payments via Bangladesh Automated Cheque Processing
System (BACPS) and Bangladesh Electronic Funds Transfer Network (BEFTN). Both the
systems operate in batch processing mode; transactions received from the banks during
the day are processed at a pre-fixed time and settled through a single multilateral netting
figure on respective bank’s clearing account maintained with BB.

7.3.1 BANGLADESH AUTOMATED CHEQUE PROCESSING SYSTEM (BACPS)

BACPS uses the Cheque Imaging and Truncation (CIT) technology for clearing of
paper-based instruments (i.e., cheque, pay order, dividend, and refund warrants etc.)
electronically. This electronic cheque presentment technique has made possible to bring
the whole country under single clearing umbrella. BACPS operation is governed by the
‘Bangladesh Automated Cheque Processing System (BACPS) V2.0 operating Rules and
Procedures’.
BACPS has two clearing sessions, namely, (i) High Value (Cheque amount BDT 5.00 lac and
above); and (ii) Regular Value (any amount below BDT 5.00 lac).
During the CY20, more than 2 million High Value and nearly 17 million Regular Value
cheques were cleared through BACPS, and the respective amounts were BDT 13,885.99
billion and BDT 7,827.29 billion respectively.
After continuous increasing trend for the last 4 years, both High Value and Regular Value
cheque processing activities decreased slightly during the review year (Chart 7.2). Various
containment measures such as general holidays, limited banking hours and opening of
business centers for a shorter period to mitigate the adverse impact of COVID-19 might be the
primary reasons for this temporary downtrend.

CHART 7.2: AUTOMATED CHEQUE CLEARING OPERATIONS (In Billion BDT)

High Value Regular Value

14,732.77 14,480.46
13,885.99
12,969.20
11,479.50

8,214.20 8,519.94
7,462.00 7,827.30
6,518.30

CY 2016 CY 2017 CY 2018 CY 2019 CY 2020

Source: Payment Systems Department (PSD), BB.

Financial Stability Report 2020 95

7.3.2 BANGLADESH ELECTRONIC FUNDS TRANSFER NETWORK (BEFTN)
Bangladesh Electronic Funds Transfer Network (BEFTN) operates as a processing and delivery
center for the distribution and settlement of electronic credit and debit transactions among
all participating banks. This Network operates in a real-time batch processing mode. A wide
range of credit transfers such as salary payment, foreign and domestic remittances, social
safety net payments, interest, and principal payment of Sanchayapatra, company dividends,
retirement benefits etc. are settled through EFT credits, while utility bill payments, loan
repayments, insurance premiums, corporate to corporate payments are accommodated by
EFT debits. BEFTN is a faster and efficient alternative of paper-based clearing and settlement
system. Recently an upgraded version of Bangladesh Electronic Funds Transfer Network
(BEFTN) module has been launched which facilitates settlement of electronic fund transfer
twice in a day.
In CY20, 66 million EFT credit and about 4 million EFT debit transactions were settled
through BEFTN, and its amount was BDT 3,177.50 billion and BDT 353.85 billion
respectively.

7.4 REAL TIME GROSS SETTLEMENT (RTGS) SYSTEM

To facilitate safe, secured, and efficient interbank payment system, Bangladesh Bank launched
Real Time Gross Settlement System (BD-RTGS) on 29 October 2015 as part of its inclusive
digitalization initiative. BD-RTGS opened a new horizon in the payment ecosystem,
accommodating instant settlement of large value and time critical payments in the country.
RTGS is an electronic settlement system where transfer of funds takes place between two
banks on a real-time and on gross basis. Real-time refers transactions that do not need any
waiting period. Transactions are settled as soon as they are executed. Pertinently, minimum
limit of a transaction is BDT 1,00,000, whereas there is no limit in case of government
payment.
Currently, RTGS system is operating only in local currency inside the country. Replacing
paper-based transaction system, RTGS is becoming more popular day by day. It is worthwhile
to mention that more than 10,100 online branches of 56 scheduled banks are currently
connected to this system. In the year 2020, the total number and amount of transactions
was 2.45 million and BDT 14,620 billion respectively.
The system is currently allowed to handle lots of lucrative features including VAT Online
Payment, Customs Duty E-Payment, Automated Challan System (ACS) etc. Beside these
individual interbank transactions, there is an option to settle all other Deferred Net
Settlement Batches (DNSB) such as BACPS, BEFTN or NPSB through RTGS system. BD-RTGS is
also linked to BB Core Banking Solution. Bangladesh Bank has provided a participating
module to the entire schedule banks for seamless communication between BB-RTGS and the
participants. RTGS system brought an immense change in the financial sector and established
an epoch-making example in the arena of Bangladesh economy.

7.5 MOBILE FINANCIAL SERVICES (MFS)

To build Bangladesh as a digitally advanced nation with the enhancement of financial
inclusion, the Mobile Financial Services (MFS) was introduced in 2011. During the last few
years, the country has witnessed an impressive growth of MFS and now 13 banks and 2
subsidiary companies are providing financial services based on mobile based technology as
an alternative payment channel in the banking sector. These MFS providers are extending

96 Financial Stability Report 2020

their activities through disbursement of remittance, cash in/out facilities using mobile phone
accounts through agents/bank branches/ATMs/mobile operators’ outlets, person to business
payments, Government to person payments, utility bill payment etc. The growth of
transactions through MFS is portrayed in Table 7.2 below:

TABLE 7.2: THE GROWTH OF TRANSACTIONS THROUGH MFS

(In Million BDT)
Category CY19 CY20 Growth
Inward Remittance 3,151.90 3,272.30 3.82%
Cash In Transaction 1,613,367.30 1,734,667.30 7.52%
Cash Out Transaction 1,541,195.70 1,544,495.70 0.21%
P2P Transaction 890,089.40 1,698,289.40 90.80%
Salary Disbursement (B2P) 101,888.30 131,888.30 29.44%
Utility Bill Payment (P2B) 50,234.50 83,434.50 66.09%
Merchant Payment 54,595.90 104,505.90 91.42%
Government Payment 19,741.00 41,441.00 109.92%
Others 70,635.30 70635.30 0.0%
Total 43,44,899.30 5,412,629.70 24.57%
Source: Payment Systems Department (PSD), BB.

Government payment showed massive growth (109.92 percent) in CY20. The growth of P2P
transaction was 90.80 percent. Merchant payment, utility bill payment and disbursement of
salary have attained satisfactory growth during CY20.
As of December 20, the total number of MFS agents is 10,58,897 and the number of
registered clients is 99.36 million, out of which the number of active accounts is about 32.3
million. At the same time, total amount of BDT 570 billion was transacted through MFS by
300 million transactions. At present, the average daily transaction volume through MFS is
about BDT 18 billion. Both the client base and agents network increased gradually during
the review year.
In CY 20, share of Cash-In transactions, person-to-person payments, utility bill payments and
merchant payments increased (Chart 7.3). However, the highest share of transactions took
place in 'Cash In' (32 percent) followed by 'P2P (31 percent) against their corresponding
figures of 37.13 percent and 20.49 percent in CY19.

CHART 7.3: CATEGORY-WISE SHARE OF TRANSACTIONS OF MFS IN CY20

Government Others, 1%
Utility Bill Merchant Inward
Payment, 1%
Payment (P2B), Payment, 2% Remittance,
2% Salary 0%
Disbursement
(B2P), 2%

Cash In
transaction, 32%
P2P transaction,
31%

Cash Out
Transaction, 29%

Source: Payment Systems Department (PSD), BB.

Financial Stability Report 2020 97

 CHART 7.4: GROWTH OF MFS

80
70
60
50
40
30
20
10
0
-10

Growth 2018 Growth 2019 Growth 2020

Source: Payment Systems Department (PSD), BB.

Chart 7.4 depicts that in CY20, except the number of accounts, all other aspects of MFS had
positive growth compared to CY19.
To foster digital payment service, BB also issued licenses to Payment System Operators (PSO)
and Payment Service Providers (PSP). Presently, five (5) non-bank institutions are facilitating
e-commerce and inter-bank card-based transactions. On the other hand, two (2) non-bank
institutions provide e-wallet under PSP license. Customers or merchants can perform all types
of digital transactions through this e-wallet. To ensure the ease of customers to send money
from one MFS account to another MFS account/bank account/card/payment service
provider/merchant payment, establishment of MFS interoperability is currently under
process.

7.6 CENTRAL DEPOSITORY SYSTEM

Central Depository System (CDS), operated by Central Depository Bangladesh Limited (CDBL),
is a major financial market infrastructure. Engaged in operations of capital market of
Bangladesh, it assists listed companies in handling of script-less delivery, settlement, and
transfer of ownership of securities through the computerized book-entry system. The agents
of CDBL, which extend depository services, are called Depository Participants (DPs).
At end-December 2020, there were 354 full-fledged DPs, 4 full-fledged exchange DPs, 99
custodian DPs and 44 treasury DPs registered under CDBL. In addition, 450 issuers have
got International Securities Identification Numbers (ISINs) from CDBL. The number of
active BO accounts as of end-December 2020 was around 3.36 million.

7.7 PAYMENT SYSTEM OVERSIGHT

Payment systems oversight is a specialized activity undertaken by the central banks around
the globe for effective supervision of their Payment, Clearing and Settlement Systems. In the
domestic context, Bangladesh Bank (BB) also has payment systems oversight framework to
achieve the objectives of ensuring safety and efficiency of its payment systems by monitoring
and assessing existing and planned payment systems and applying policy changes as and
when necessary. To strengthen and streamline its oversight activities, BB worked closely with
different stakeholders and came up with “Payment Systems Oversight Policy
Framework-2019”, which has been duly approved and enforced with effect from January 2019.

98 Financial Stability Report 2020

This Policy Framework is facilitating effective oversight of payment systems, instruments,
procedures and all the related parties having licensed from BB. As per the Payment Systems
Oversight Framework, Bangladesh Bank monitors the activities of payment systems and
market participants by collecting off-site data and information and also performs on-site
inspection as well. The area of oversight is also being extended to review the legal and
regulatory framework of existing payment systems, setting standards, ensuring fair access,
protecting consumer rights, etc. As a part of oversight, individual Operational Risk Framework
of payment platforms has been enforced. Assessment is done using various analytical tools
and on the basis of collected data; potential risks are identified, and reports are prepared
accordingly. Various measures have been taken so far for the betterment of the payment
ecosystem.

7.8 INITIATIVES TAKEN DURING CY20

Amid the COVID-19 pandemic, Payment System and Digital Finance Access played a crucial
role to run the economy well, especially when maintaining physical distance and staying
home became inevitable. During the pandemic, Bangladesh Bank has issued different
directives and performed various actions in the arena of payment systems as a part of
restoring the economic activities of the country. These are briefly mentioned below:
(a) Government stimulus package for salary and allowances of Garment workers was directly
disbursed to their Mobile wallets accounts. Also, cash assistance declared by honorable
Prime Minister for 5 (five) million marginal families was disbursed directly to the
beneficiaries’ mobile accounts. To make these initiatives successful, 2.2 million new mobile
accounts (most of which are female) were opened. The cash-out charge for the workers’
salaries were reduced to 0.8 percent from 1.85 percent.
(b) Person-to-person transaction limit through mobile wallets was enhanced from BDT
75,000 to BDT 2,00,000 for purchasing the emergency food/daily necessities and medicine.
Cash Out charges have been made free for up to BDT 1,000 per day. Charges were eliminated
for the seller of the emergency food/daily necessities and medicines. Near Field
Communication (NFC) card transaction limit (for NFC payments) has been enhanced from
BDT 3,000 to BDT 5,000 per transaction.
(c) E-Commerce and M-Commerce: Bangladesh has been experiencing a surge in
E-commerce in recent times especially since the beginning of lockdown in late March 2020
due to COVID-19 pandemic. At present, the most prevalent type of E-commerce in the
country is Business to Consumer (B2C). However, Consumer to Consumer (C2C) and Business
to Business (B2B) are still at an early stage. Unlike many countries, a large part of E-commerce
consists of small social media based micro merchant services.
M-commerce, which is basically E-commerce through mobile devices, is the largest part of
E-commerce in the country. Cheap smart devices, easily accessible mobile data and popular
mobile payment platforms have created the ideal combination to choose mobile devices
over computers. M-commerce not only help make easy retail purchases, but also makes
commercial transactions like online banking and bill payments successful.
Bangladesh Bank has been gradually developing the payment infrastructure to create
enabling environment for E-commerce. It has recently introduced “Personal Retail Account”
where the smallest retailers (both off and on-line) can have a bank/mobile account to receive
consumer payments as well as make their own merchant payments. On the other hand,
Bangladesh Bank is contemplating a policy on escrow system which may enhance protection

Financial Stability Report 2020 99

of consumers’ rights at grass root level. With the right policy and infrastructure, this sector
has the potential to make a real impact on the economy of the country.
Bangladesh Bank remained vigilant during CY20 to ensure the security of the entire payment
system. As a part of effective payment system oversight, Bangladesh Bank has taken several
measures and created awareness among banks/FIs/MFS providers and stakeholders
including customers to stop digital frauds in the systems. The respective stakeholders were
appeared to remain careful in performing transactions through digital payment platform
and strengthened their cyber security activities at the transaction levels. The occurrence of
frauds by using payment system was insignificant and loss involved thereto was also
negligible. In short, no major threat to financial stability arose from payment systems
infrastructure during CY20.

100 Financial Stability Report 2020

Chapter 8
FOREIGN EXCHANGE MARKET
Foreign exchange (FX) market of Bangladesh remained stable in CY20. The increasing trend of
FX assets and liabilities as well as FX off-balance sheet items of banks was continued during
the year. The interbank (local) FX turnover also increased compared to that of CY19. During
the review period, L/C opening decreased slightly, and L/C settlement decreased
substantially, thereby mitigating the pressure on FX market. Besides, record growth in wage
earners’ remittances, low import payment and increased external debt were the catalyst in
raising the foreign exchange reserve. However, BB’s prudent intervention in the market,
through purchasing USD, helped to stabilize the nominal exchange value of BDT against USD.
As a result, gross FX reserves hit the new record and appeared to be strong enough to
withstand probable external shocks in the foreseeable future. Furthermore, movement of real
effective exchange rate (REER) index was less volatile with a mild appreciation during the year.

8.1 FOREIGN EXCHANGE ASSETS AND LIABILITIES

FX denominated assets and liabilities constituted around 9.6 and 8.9 percent of total banking
sector assets and liabilities respectively in CY20. Due to the limited exposure, FX turnover of
banks remained in comfort zone during the review period.
FX denominated assets of the banking sector are mainly composed of cash holdings, BB
clearing account, debit balance in Nostro accounts, foreign currency bills purchased,
investment in off-shore banking units (OBUs) and others. At end-December 2020, banks’ total
FX assets increased by 36.4 percent and stood at USD 20.1 billion from USD 14.7 billion at
end-December 2019 (Chart 8.1).

Chart 8.1: Year-wise Fx Assets And Liabilities

25

20.1
20 18.5

14.7
13.9
In Billion BDT

15

10 8.8
7.7

0
FX Assets FX Liabilities

2018 2019 2020

Sources: FEPD, BB.

On the other hand, FX denominated liabilities are mainly composed of credit balances in Nostro
accounts, back-to-back L/Cs fund awaiting for remittance, balances in customer accounts (such
as, non-resident foreign currency deposit (NFCD), resident foreign currency deposit (RFCD),
exporters' retention quota (ERQ), FC accounts, foreign demand draft (FDD), telegraphic transfer
(TT) and mail transfer (MT payables). Pertinently, FX liabilities recorded 33.1 percent increase from
USD 13.9 billion at end-December 2019 to USD 18.5 billion at end-December 2020. (Chart 8.1)

Financial Stability Report 2020 101

8.2 FOREIGN EXCHANGE CONTINGENT LIABILITIES
Off-balance sheet items denominated in FX decreased in CY20 compared to that of CY19.
FX denominated off-balance sheet
Chart 8.2: Components Of Fx Contingent Liabilities
(End-december 2020) items, which is a dominant portion
0.6% of total banking sector off-balance
sheet exposures, decreased from
USD 56.8 billion at end-December
29.2%
2019 to USD 50.9 billion at
end-December 2020. FX off-balance
61.1% sheet items were composed of four
9.1%
major accounts: letter of credits
(L/Cs), letter of guarantees,
acceptances and others. These four
Letter of credit Letter of guarantee
Acceptances Others
components accounted for 61.1
percent, 9.1 percent, 29.2 percent
Source: FEPD, BB (Data for April and May 2020 were not and 0.6 respectively in CY20.
available) .
74 Decline in the value of FX
off-balance sheet items in foreign
currency implies lesser need of foreign currency for future payments, which may contribute to
future stability in the foreign exchange market.

8.3 INTERBANK (LOCAL) FX TURNOVER

Interbank (local) FX turnover, led by swap transactions, was recorded at USD 34.48 billion in
CY20. Both FX turnover and FX net open position increased in the second half of the CY20. FX
net open position remained well below the approved limit of BB.
Interbank (local) FX market has been dominated by swap transactions since 2015. This is due
to the fact that swap transactions provided the market participants more flexibility in FX
liquidity risk management.

CHART 8.3: COMPONENTS OF INTERBANK FX TURNOVER (CY20) In CY20, 89 percent of total interbank
(local) FX turnover was represented by
2%
swap transactions followed by 9 percent
9% spot transactions and 2 percent forward
transactions (Chart 8.3). More than 98
percent of these transactions were
executed in USD. Compared to CY19,
swap transactions increased by 112
percent, while forward transactions
decreased by 30 percent in CY20.

89%

Spot Swap Forward

Source: FRTMD, BB (Data for April and May 2020 were

not available).

74
Due to countrywide general holidays to limit the spread of COVID-19, some data like contingent liabilities, Net Open Position,
Interbank FX turnover were not available and related analyses were prepared based on the available data.

102 Financial Stability Report 2020

Total interbank (local) FX turnover increased from USD 15.71 billion in CY19 to USD 34.48
billion in CY20, recording an increase of 119.48 percent. The monthly average (for 10 months)
turnover of interbank (local) FX transactions was USD 3.45 billion in CY20, which was USD 1.33
billion in CY19 (Chart 8.4). The monthly FX turnover showed an increasing trend during CY20
(Chart 8.5).

CHART 8.4: ANNUAL FX TURNOVER CHART 8.5: MONTHLY FX TURNOVER (CY20)

40 4.0
5,000

Avg. Monthly FX Turnover (billion USD)

35 3.5
Annual FX Turnover (billion USD)

4,500
30 3.0 4,000
25 2.5 3,500

In million USD
3,000
20 2.0
2,500
15 1.5
2,000
10 1.0 1,500
5 0.5 1,000
500
- -
CY16 CY17 CY18 CY19 CY20 -

Nov-20
Jun-20

Oct-20

Dec-20
Jul-20
Feb-20

Sep-20
Aug-20
Mar-20
Jan-20
Annual FX Turnover Average monthly FX Turnover

Source: FRTMD, BB (Data for April and May 2020 were not available).

The overall FX net open position was USD 1.57 billion at end-December 2020 as compared to
USD 0.87 billion at end-December 2019. The highest balance of USD 1.61 billion was recorded
at end-August 2020, while the lowest balance of USD 0.86 billion was observed at
end-January 2020. However, it remained well below the approved limit75 set by Bangladesh
Bank.
CHART 8.6: FX NET OPEN POSITION (CY20)

2,000

1,500
In million USD

1,000

500

-
Jun-20

Nov-20

Dec-20
Jul-20

Oct-20
Feb-20

Sep-20
Mar-20

Aug-20
Jan-20

Source: FEPD, BB (Data for April and May 2020 were not available).

8.4 ADEQUACY OF FX RESERVES

Gross FX reserves of Bangladesh stood at USD 42.97 billion at end-December 2020. This
amount is well above the international benchmarks in terms of reserve adequacy and
deemed to be sufficient to withstand probable external shocks in the foreseeable future.

75
Approved limit of NOP is currently 20 percent of Tier-1 and Tier-2 capital.

Financial Stability Report 2020 103

Adequacy of FX reserves is an important parameter in assessing an economy’s ability to
absorb external shocks76.
The gross FX reserves increased by 32.1 percent from USD 32.7 billion at end-December 2019
to USD 43.2 billion at end-December 2020. The reserves are sufficient to cover 8 months’
import payments (Chart 8.7), which is much higher than the international benchmark of
meeting three months’ import payments. Also, in terms of reserves to M2 (broad money)
criteria77, Bangladesh has been positioning above the reference level of reserves. Chart 8.8
shows that reserves to M2 ratio increased by 3.4 percentage points in CY20 to register at 24.8
percent.
CHART 8.7: IMPORT COVERAGE OF FX RESERVE CHART 8.8: RESERVES TO M2 RATIO
10 50
30% 26.7% 26.1%
24.8%
8 40 23.2%
21.4%
Number of Months

25%

In Billion USD
6 30 20%
15%
4 20
10%
2 10
5%
0 - 0%
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020

FX Reserves Import Coverage Reserves/M2

Source: NSDP, BB Website; Statistics Department, BB.

In terms of short-term external debt (STD) to FX reserves criteria, which suggests a ratio less
than 100 percent as safe, Bangladesh remained in comfortable zone as only 25.5 percent of
the reserves is required to cover the external debts becoming due in next 12 months (Chart
8.9). Although STD has grew in CY20, even a higher growth of FX reserves may help to
increase resilience against the shocks from short-term external debt.

CHART 8.9: SHORT-TERM EXTERNAL CHART 8.10: RESERVES ADEQUACY

DEBT TO RESERVE RATIO MEASURES FOR BANGLADESH
50
35%
32.2%
28.2% 29.8% 40
30%
24.3% 25.5%
In billion USD

30
25%
20% 20

15% 10

10%
-
5% 2016 2017 2018 2019 2020

0% FX Reserves=3 Months Import

2016 2017 2018 2019 2020 FX Reserves=20% of M2
FX Reserves=Total STD
STD/Reserve FX Reserves

Source: NSDP, BB Website; Statistics Department, BB.

76
There are different benchmarks for measuring FX reserve adequacy; however, assessing reserve adequacy based on a single
indicator may not ensure a country’s resilience against foreign exchange shock. Three mostly used international benchmarks
are: (i) import coverage of FX reserve, (ii) reserves equal to 20 percent of M2, and (iii) reserves sufficient to cover external debt
becoming due within 12 months (short-term external debt). Considering these benchmarks, the reserve adequacy position of
Bangladesh has been examined. For details see Islam, M.S. (2009), "An Economic Analysis of Bangladesh's Foreign Exchange
Reserves", ISAS Working Paper No. 85, Singapore, September.
77
This indicates an economy’s ability to withstand external shocks and ensure convertibility of local currency.

104 Financial Stability Report 2020

As Chart 8.10 indicates FX reserve of Bangladesh appeared to be adequate in terms of each of
the three individual benchmarks of reserve adequacy. This implies that financial system of
Bangladesh is expected to remain resilient to probable external sector vulnerabilities.

8.5 WAGE EARNERS' REMITTANCE

Wage earners’ remittance recorded a new peak in CY20 providing stability in the FX
market.

CHART 8.11: WAGE EARNERS’ REMITTANCE The remittance inflow increased

markedly from USD 18.3 billion in CY19
to USD 21.7 billion in CY20. Record
25
amount of remittance inflow in the
20 review year helped maintain stability in
the supply side of the FX market, thereby
In Billion USD

15
strengthening resilience to external
10 shocks.
5

-
CY16 CY17 CY18 CY19 CY20

Source: Monthly Economic Trend, BB.

8.6 EXCHANGE RATE MOVEMENT

Nominal exchange rate was largely stable throughout the review year.
Nominal exchange rate was mostly stable in CY20 even with an appreciation of 0.12 percent
as opposed to 1.2 percent and 1.6 percent depreciations recorded in CY19 and CY18
respectively. Increased stock of FX reserve supported by record amount of remittance inflow
helped to maintain the stability in the nominal exchange rate in CY20.
Chart 8.12 shows that the monthly
CHART 8.12: EXCHANGE RATE MOVEMENT (BDT/USD)
average nominal BDT/USD exchange
86.0 rate (dotted line) remained almost
stable throughout the CY20. The
84.0
maximum exchange rate (BDT 84.95
82.0
per USD) was recorded during
80.0 February to May 2020 while the
78.0
minimum (BDT 84.80 per USD) was
recorded in November 2020.
76.0

74.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2016 2017 2018 2019 2020

Source: Monthly Economic Trend, BB.

Financial Stability Report 2020 105

8.7 MOVEMENT OF REAL EFFECTIVE EXCHANGE RATE (REER)
Real effective exchange rate (REER) experienced mild appreciation amid some fluctuations
in CY20.
Chart 8.13 shows the trend of REER movement in CY20 (dotted line) along with those of last
three calendar years. REER78 index registered an appreciation of 0.76 percent during the
review year. The index steadily increased during the first quarter and peaked at 115.86.
Subsequently, it started decreasing and reached 110.73 at the end of the year.

CHART 8.13: REER MOVEMENT Movement of REER was less volatile in the
120.0
last four years, as the standard deviation of
REER was 1.61 in CY20, while it was 2.10, 3.82
115.0
and 2.61 in CY19, CY18 and CY17
110.0
respectively. However, appreciation of REER
REER Index

105.0
in the last two years might have impacted
100.0
the efficiency of export competitiveness
95.0 with the neighboring countries.
90.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2017 2018 2019 2020

Source: Monetary Policy Department, BB.

8.8 OPENING AND SETTLEMENT OF LETTER OF CREDIT (L/C)

Both L/C opening and L/C settlement decreased in the review year due to COVID-19
pandemic.

CHART 8.14: L/C OPENING CHART 8.15: L/C SETTLEMENT

6,000 70,000 5,000 60,000

60,000 4,500
5,000 50,000
4,000
50,000
4,000 3,500 40,000
40,000
3,000
3,000 30,000
30,000
2,500
2,000 20,000 2,000 20,000
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020

Yearly Total (USD in Million)- RHS Yearly Total (USD in Million)- RHS

Monthly Average (USD in Million)-LHS Monthly Average (USD in Million)-LHS

Source: Major Economic Indicators, BB.

The L/C opening for import decreased from USD 57.0 billion in CY19 to USD 55.8 billion in
CY20, registering a decline of 2.1 percent during the review year. The L/C settlement also
decreased by 14.3 percent and recorded at USD 46.7 billion in CY20 from USD 54.5 billion in
CY19. Decrease in L/C settlement eased some pressure on the demand for USD.

78
REER index is a combination of 15 currencies in a basket with the base year set at 2015-16=100; it is a measure that adjusts the
nominal exchange rate for differences in domestic inflation and those of the country's main trading partners.

106 Financial Stability Report 2020

8.9 INTERVENTION IN FX MARKET BY BB
Bangladesh Bank purchased USD 6.4 billion from the FX market and sold USD 0.66 billion
thereto in CY20.

CHART 8.16: INTERVENTION IN FX MARKET

In the floating exchange rate regime,
BY BANGLADESH BANK Bangladesh Bank occasionally intervenes
into the foreign exchange market to
7
maintain the exchange rate stability when
6
it deems necessary. During the review
5
year, the central bank purchased USD 6.4
In Billion USD

4
3
billion from the market and sold USD 0.66
2
billion, resulting in a net purchase of USD
1 5.74 billion, whereas it only sold USD in
0 the last two years (Chart 8.16). To stabilize
2013 2014 2015 2016 2017 2018 2019 2020 the exchange rate, BB mopped up
USD Purchased USD Sold significant amount of foreign currencies
expanded as result of strong inflow of
Source: FRTMD, BB.
wage earners’ remittances, increased
external debt along with less L/C
settlements in CY20.
Because of this intervention by BB, more liquidity was added in the financial system of
Bangladesh. As Chart 8.17 shows, Net Foreign Assets (NFA) increased significantly by 30.2
percent in CY20.
Due to substantial growth of NFA,
CHART 8.17: NDA, NFA, RM AND M2 MOVEMENT
Reserve Money (RM) registered a higher
35% than average growth (21.2 percent)
30% despite a moderate growth (9.4 percent)
25% in Net Domestic Asset (NDA), the other
20% source of RM. Broad Money (M2)
15% recorded an increase of 14.2 percent,
10% marginally higher than target level of 14
5% percent.
0%
CY 15 CY16 CY17 CY18 CY19 CY20

NFA NDA M2 RM

Source: Major Economic Indicators, BB.

Financial Stability Report 2020 107

Chapter 9
INSURANCE SECTOR IN BANGLADESH
Being an integral part of the financial system, insurance sector is vital for the financial stability
of the country. This sector plays a significant role by providing insurance to domestic as well
as rapidly expanding international businesses. Since the economy of Bangladesh is being
increasingly integrated with the world economy through international trade and commerce,
this sector appears to get more attention over the years. On the domestic front, insurance
sector is one of the major suppliers of fund in local deposit market, fixed income securities
market and stock market. Poor performance of this sector may create vulnerability and
therefore, has implication for the stability of these inter-linked and inter-dependent markets.
On the other hand, the role of fund mobilization in financial intermediation as well as risk
insulation by the insurers promotes stability in the financial system of Bangladesh. Hence,
proper facilitation and intensive monitoring of the insurance sector has utmost importance
from financial stability point of view.
Mentionable that business of insurance companies is quite different from that of banks and
other financial institutions. An important difference between banking and insurance lies in
the balance sheet structure. Generally, the average maturity of life insurance companies’
liabilities is longer than that of their assets. It makes them less vulnerable to customer runs,
while provides the opportunity to invest in long-term instruments of banks and equity
market. Therefore, investment behavior of insurance sector and its soundness should receive
notable attention since insurance not only protects policyholders but also contributes to the
stability of financial system as a whole.
In general, insurers in Bangladesh diverse their products in the form of life insurance, general
insurance, reinsurance, micro-insurance, and Takaful or Islami insurances with different
schemes and endowments. At present, 32 life insurance companies (including a foreign
company and a public company) and 46 general (non-life) insurance companies (including a
public company) are doing business in Bangladesh. Insurance Development and Regulatory
Authority (IDRA) is solely responsible for the regulation and supervision of the insurance
industry.

9.1 INSURANCE SECTOR DEVELOPMENT: PENETRATION AND DENSITY

Insurance penetration ratio is considered to measure the level of development of insurance
sector in Bangladesh. The ratio of insurance premium underwritten in a particular year to GDP
is used to estimate the insurance penetration ratio. Chart 9.1 shows the trend in insurance
premium as a share of GDP in Bangladesh during 2015-2020. The insurance penetration ratio
declined to 0.5 percent in CY20 from 0.56 percent in CY19. Moreover, the decreasing trend is
observed for both non-life and life insurance companies. Non-life and life insurance
penetration ratio declined to 0.16 percent and 0.34 percent in CY20 from 0.18 percent and
0.38 percent respectively from the previous year. The reduction in penetration ratio was
higher for life insurance companies compared to non-life insurance companies.
Moreover, the overall penetration ratio (0.50 percent) of the sector in CY20 appeared to be low
compared to other neighboring countries. Insurance density or per capita premium is
calculated as the ratio of total premiums to total population, which indicates the average level
of insurance coverage of mass people. The insurance density ratio decreased to USD 9.7 in

Financial Stability Report 2020 109

CY20 from USD 10.2 in CY19 (Chart 9.2), which was also low compared to other South-Asian
countries. The slow growth of insurance premium compared to GDP growth resulted in
downward trend in insurance penetration ratio. On the other hand, the insurance density
ratio is low as majority of people in Bangladesh remain outside the insurance coverage due to
its less popularity to the mass segments of the country.
CHART 9.1: INSURANCE PENETRATION CHART 9.2: INSURANCE DENSITY RATIO

0.70% 1,000 12
900
0.60% 10
800

Amount in BDT

Amount in USD
0.50% 700
8
0.40% 600

0.30%
500 6
400
0.20% 300 4
0.10% 200
2
100
0.00%
2015 2016 2017 2018 2019 2020 - -
2015 2016 2017 2018 2019 2020
Total Penetration Ratio
Life Insurance Penetration ratio Per Capita Insurance Premium in BDT

General (Non-life) Insurance Penetration ratio Per Capita Insurance Premium in USD

Sources: IDRA, FSD calculations. Source: IDRA, Population Census BBS, FSD calculations.

9.2 PREMIUM GROWTH AND ASSET SIZE

Chart 9.3 exhibits the trend in gross premium (in terms of both amount and percent) of the
insurance industry in Bangladesh. It shows that gross premiums of insurance companies
declined slightly in CY20 compared to CY19. In CY20, gross premiums of life insurance and
non-life insurance stood at BDT 95.0 billion and BDT 44.0 billion respectively compared to the
same of BDT 96.0 billion and BDT 47.2 billion in 2019. Noteworthy, the life insurance
companies contributed approximately 68 percent of the total gross premium in CY20. Overall,
total gross premium in insurance sector decreased by 2.9 percent in CY20 largely due to the
impact of ongoing pandemic.
CHART 9.3: TREND IN GROSS PREMIUM AND ITS GROWTH CHART 9.4: TREND IN INSURANCE SECTOR ASSET
160 20% 500 3%
450
140
3%
15% 400
120
350
2%
In Billion BDT

100
In Billion BDT

10% 300
80
250 2%
60 5%
200
1%
40 150
0%
20 100
1%
0 -5% 50

2015 2016 2017 2018 2019 2020 0 0%

2015 2016 2017 2018 2019 2020
Gross Premium (General/Non-Life)
Gross Premium (Life) Assets (General/Non-Life Insurance)
Gross Premium (Total) Assets (Life Insurance)
Growth in Total Gross Premium (Right Axis) Total Assets to GDP (Right axis)

Source: IDRA, FSD calculations.

Chart 9.4 exhibits trend in insurance sector’s assets from CY15 to CY20. In CY20, assets of life
insurance and non-life insurance stood at BDT 436.7 billion and BDT 132.3 billion respectively
compared to BDT 411.8 billion and BDT 122 billion respectively in the preceding year. Overall,
total assets of insurance sector grew by 6.6 percent in CY20 to stand at BDT 569 billion.
Noteworthy, assets of the life insurance companies constituted more than three fourth of the
total assets of the insurance sector in 2020 (Chart 9.5).

110 Financial Stability Report 2020

 CHART 9.5: SHARE OF INSURANCE CHART 9.6: ASSET STRUCTURE OF LIFE AND GENERAL
SECTOR’S TOTAL ASSET INSURANCE COMPANIES (CY-20)
100% 60%
21% 22% 23% 22.6% 22.9% 23.3%
80% 50%
40%
60%
30%
40% 79.1% 78.5% 77.2% 77.4% 77.1% 76.7% 20%

20% 10%
0%
0% Investment Fixed Cash & Bank Debtors Other Fixed Assets
2015 2016 2017 2018 2019 2020 Deposit Balance Assets

Share of Assets (General/Non-Life Insurance)

Life Insurance General (Non-life) Insurance
Share of Assets (Life Insurance)

Source: IDRA, FSD calculations.

Chart 9.6 illustrates the asset concentration of the life and general (non-life) insurance
companies in CY20. Investment was the largest asset class with 55.1 percent share in the total
assets of life insurance sector followed by fixed deposit, other assets, fixed assets, cash and
bank balance, and debtors with shares of 17.3 percent, 14.7 percent, 8.0 percent, 4.6 percent,
and 0.2 percent respectively. It is worth noting that fixed deposit held the top position with
30.9 percent share in total assets of general (non-life) insurance companies followed by other
assets, investment, fixed assets, debtors and cash and bank balance with shares of 25.1
percent, 16.4 percent, 12.9 percent, 8.4 percent, and 6.4 percent respectively.

9.3 PERFORMANCE AND SOUNDNESS OF GENERAL INSURANCE SECTOR

Table 9.1 demonstrates the major performance and soundness indicators of general insurance
companies in Bangladesh for CY19 and CY20. Profitability indicators showed mixed
performance in general insurance sector. Claims ratio79 decreased in CY20 compared to that of
the previous year. Moreover, commission ratio and management expense ratio have also
decreased in CY20 than those of the previous year, which eventually contributed positively to
the profitability. The return on assets (ROA), return on investment (ROI) and return on equity
(ROE) indicate an improvement in the profitability of the insurance sector in CY20 compared to
the previous year.
Leverage indicators show lower leverage in the sector during the review year. Gross premium
to equity ratio was also lower. Moreover, decline in total assets to equity ratio in CY20
indicates lower financial leverage. Mentionable that risk retention rate (RRR) of general
insurance sector stood at 58.6 percent in CY20, increased from the preceding year (55.2
percent). Thus, risk sharing among the insurance companies decreased, which might be a
concern from financial stability point of view.

79
Claims ratio calculated as claims paid as a percentage of gross premium.

Financial Stability Report 2020 111

 TABLE 9.1: PERFORMANCE AND SOUNDNESS INDICATORS-GENERAL/ NON-LIFE INSURANCE
Profitability 2019 2020
1 28.3% 25.0%
Claims Ratio
Commission Ratio 2 25.9% 25.0%
3 46.3% 45.5%
Management Expense Ratio
ROA 4 4.1% 5.85%
4
ROE 9.0% 9.92%
ROI 4 7.4% 7.8%
Leverage 2019 2020
Gross Premium to Equity Ratio 69.8% 61.1%
Total Assets to Equity Ratio 2.2 1.7
Reinsurance 2019 2020
Risk Retention Rate 5 55.2% 58.6%
1. Claims paid as a percentage of gross premium.
2. Agency Commission as a percentage of net premium.
3. Management expense as a percentage of net premium.
4. ROA, ROE & ROI have been calculated based on 39 general insurance companies (in 2019) and
37 companies (in 2020) out of 46.
5. Net premium as a percentage of gross premium

Source: IDRA, FSD calculations.

9.4 COMPARISON AMONG DIFFERENT CATEGORIES OF GENERAL INSURANCE

In Bangladesh, services of general insurance are categorized as fire, marine, motor, and
miscellaneous insurance. Chart 9.7 illustrates the category-wise gross and net premium in
CY20. The Chart shows that fire insurance was the highest source of gross premium in CY20,
followed by marine, miscellaneous and motor insurance. However, marine insurance took
the top position based on the net premium followed by fire, miscellaneous and motor.
Chart 9.8 shows the risk retention rate by business category. It exhibits that risk retention
rate differs in different insurance categories. Reinsurance was mostly used for motor (93%)
followed by marine, miscellaneous and fire insurance.

CHART 9.7: GROSS AND NET PREMIUM BY BUSINESS CHART 9.8: RISK RETENTION RATE BY BUSINESS

20 100%
93%
18 90%
16 80% 72%
14 70%
60% 46% 47%
BDT in Billion

12
50%
10
40%
8 30%
6 20%
4 10%
2 0%
0 Fire Marine Motor Misc/Acct
Fire Marine Motor Miscellaneous
Subsector's Risk Retention Rate
Gross Premium Net Premium General Insurance Risk Retention Rate

Source: IDRA, FSD calculations.

112 Financial Stability Report 2020

Chart 9.9 presents the ratios of claims paid to gross premium ratios and underwriting profit to
net premium80 of general insurance by business type. The Chart shows that marine and motor
insurance paid lower claims as a percentage of gross premium in CY20 compared to that of
fire and miscellaneous insurance. On the other hand, underwriting profit to net premium was
highest for motor insurance in CY20 followed by marine, miscellaneous and fire insurance.
The share of underwriting profit by business category is exhibited in Chart 9.10. The chart
depicts that the marine insurance had the largest share of underwriting profit, 57 percent of
total underwriting premium while motor, fire and miscellaneous insurance captured 22
percent, 12 percent and 9 percent share respectively.
CHART 9.9: CLAIMS PAID & UNDERWRITING CHART 9.10: UNDERWRITING PROFIT
BY BUSINESS (CY20) BY BUSINESS (CY20)

50%
45%
40%
35% 9% 12%
30%
25% 22%
20%
15%
10%
57%
5%
0%
Claims paid to Gross Premium Underwriting Profit to Net Premium

Fire Marine Motor Miscellaneous

Fire Marine Motor Miscellaneous

Source: IDRA, FSD Calculation

9.5 PERFORMANCE AND SOUNDNESS OF LIFE INSURANCE SECTOR

Table 9.2 represents some major performance and soundness indicators of life insurance
companies in Bangladesh for CY19 and CY20. Overall, life insurance companies’ claims ratio
increased in CY20 whereas management expense ratio decreased in the review year
compared to the preceding year. Therefore, combined ratio remained stable (102 percent in
both CY20 and CY19). The excessive combined ratio (more than 100 percent) warrants a
regular analysis and monitoring of insurers’ financial performance and assessments of their
risk by the regulators.

TABLE 9.2: PERFORMANCE AND SOUNDNESS INDICATORS-LIFE INSURANCE

Profitability 2019 2020
Claims Ratio 68.1% 70.9%
Management Expense Ratio1 33.9% 31.1%
Combined Ratio 102% 102%
Capital & Investment 2
Capital to Asset Ratio 2.5% 2.4%
Investment to Total Assets Ratio 50.4% 55.1%
Return on Investment (ROI) 8.3% 7.7%
Investment, interest, dividend and other income to 43.7% 42.7%
Net Premium Ratio
1
Management Expense ratio contains commission paid and other operating expense.
2 Calculation is based on 32 (out of 33) life insurance companies due to data unavailability.
Source: IDRA, FSD calculations.

80
Calculation is based on 43 (out of 46) general insurance companies.

Financial Stability Report 2020 113

The capital to asset ratio in Table 9.2 demonstrates that, capital of life insurance companies
relative to their assets is reasonably low. In this case, the additional capital buffer is needed to
mitigate unforeseen losses. This ratio also decreased marginally in CY20. Investment, the
principal asset item of the balance sheet of life insurance companies, increased considerably
as a percentage of total assets in CY20, but return on Investment (ROI) declined in CY20. It is
also evident that investment, interest, dividend and other income as a percentage of net
premium declined in CY20.

9.6 CONCENTRATION IN INSURANCE SECTOR

Table 9.3 demonstrates that both the general and life insurance sectors were highly
concentrated among Top 5 companies in terms of asset size and gross premiums. Especially,
in general insurance sector, assets and gross premiums are concentrated into a single public
sector insurance company-Sadharan Bima Corporation. However, as insurance sector for both
life and general is highly concentrated into top five companies, these companies warrant
rigorous monitoring by IDRA as they might pose systemic risks.
TABLE 9.3: CONCENTRATION OF ASSET AND PREMIUM IN INSURANCE COMPANIES (CY20)
Concentration in Life Insurance
Asset Size Gross Premium
Total sector (BDT in billions) 436.74 95.0
Top 5 insurance companies' (BDT in billions) 340.3 63.0
Concentration in top five companies 77.9% 66.3%
Concentration in Jibon BimaCorporation (JBC)* 5.42% 6.31%
Concentration in General Insurance
Asset Size Gross Premium
Total sector (BDT in billions) 132.3 44.0
Top 5 insurance companies' (BDT in billions) 73.1 21.9
Concentration in top five companies 55.3% 49.8%
Concentration in Sadharon Bima Corporation (SBC)* 30.7% 23.1%
*
Jibon Bima Corporation (JBC) and Sadharon Bima Corporation (SBC) are the public sector insurance companies and lead the life
insurance and general insurance respectively.

Source: IDRA, FSD Calculation.

9.7 INTERCONNECTEDNESS BETWEEN INSURANCE AND OTHER SECTORS

Investment portfolio of life and general insurance companies are exhibited in Chart 9.11 and
Chart 9.12 respectively. Government Bonds captured major portion of investment portfolio of
life insurance followed by investment in FDR, real estate and capital market (Chart 9.11). On
the contrary, investment portfolio of general insurance companies’ shows greater weight in
FDR followed by capital market and real estate (Chart 9.12).

114 Financial Stability Report 2020

 CHART 9.11: INVESTMENT PORTFOLIO OF LIFE INSURANCE CHART 9.12: INVESTMENT PORTFOLIO OF GENERAL INSURANCE
70%
60%
60%
50%
50%
40%
40%

30% 30%

20% 20%

10%
10%
0%
0% Government Debentures Capital Real Estate FDR Other
Government Debentures Capital Real Estate FDR Bonds Market investment
Bonds Market

2019 2020 2019 2020

Source : IDRA, FSD calculation.

Insurance companies earn a large portion of their interest income by maintaining fixed
deposits with banks and FIs. In CY20, fixed deposit registered the highest percentage of total
assets for general (non-life) insurance companies while it took the second highest percentage
of total assets for life insurance companies. Around 22 percent of the total assets of the
insurance sector was deposited to banks and financial institutions as fixed deposit in CY20
(Chart 9.13) which is equivalent to only 2.51 percent of the total fixed deposits held with the
banking sector in 2020. So, unexpected withdrawal of fixed deposits by the insurance
companies may not emanate any substantial risk for the banking sector. On the contrary, any
crisis in the banking and FI sectors could create adverse shock on insurance sector as the
significant portion of their assets will be affected by that. As a consequence, it may create
huge pressure on the insurance companies to meet their obligation in due time.
CHART 9.13: FIXED DEPOSIT AS A PERCENT CHART 9.14: INSURANCE SECTOR’S YEAR-END
OF TOTAL ASSETS (CY-20) MARKET CAPITALIZATION IN DSE

50% 4.5% 4.06%

3.98%
45% 4.0%
40% 3.5% 3.1%
3.0%
35% 3.0% 2.6%
30% 2.5%
25%
2.0%
20%
1.5%
15%
10% 1.0%
5% 0.5%
0% 0.0%
Life Insurance General (Non-life) Total Insurance 2016 2017 2018 2019 2020
Insurance Sector
Insurance
Source : IDRA, FSD calculation. Source : DSE, FSD calculation.

Similarly, investment in share market by the insurance companies is exposed to equity price
risk. So, poor performance of stock market may put stress on the insurance sector’s
investment sourced from premium, reserve fund and other sources. But any stress on
insurance market will have limited impact on the stock market as market capitalization of
insurance sector in Dhaka Stock Exchange (DSE) was 4.06 percent in CY20 (Chart 9.14).
Moreover, the newly formulated Insurance Corporation Act 2019 is comprised of the
provisions from both the Bima Act 2010 and the Insurance Development and Regulatory
Authority Act, 2010. One of the most significant changes made in the new law is to increase
the ceiling of authorized and paid-up capital for both Jibon Bima Corporation and Sadharan
Bima Corporation. The provisions regarding insurance of government property as well as
eligibility criteria of board of directors have also been updated.

Financial Stability Report 2020 115

Performance of the insurance sector was sluggish in the review year. Despite a marginal
growth in total assets, gross premium in both life and general insurance declined in CY20.
Increasing trend of claims in life insurance and reduction in net premium during CY20
impacted the profitability. Regulatory reforms, better corporate governance, sustainable cost
management strategies, diversifying business portfolios, digitalization, one stop customer
service and introduction of innovative insurance products (focusing agriculture, health,
safety, convenience, education) may support the growth of the industry and eventually
promote financial stability.

116 Financial Stability Report 2020

Chapter 10
MICROFINANCE INSTITUTIONS (MFIs)
Microfinance institutions (MFIs) play a pivotal role in the socio-economic development of
Bangladesh by providing financial services to the poor segment of households, especially the
women. Microcredit Regulatory Authority (MRA) with the continuous support of the
Government of Bangladesh regulates and supervises the major microcredit programs in
Bangladesh. In FY20, this sector provided financial services to 33.3 million members through
759 licensed institutions. Amidst the first wave of COVID-19 pandemic, microfinance sector
maintained notable growth showing its resilience to withstand adverse shock. Considering its
small market share and comparatively low NPL ratio partly owing to COVID-19 related
stimulus package, the sector did not pose any major threat for financial stability of the
country.

10.1 OUTLOOK OF MICROFINANCE SECTOR

The microfinance sector in Bangladesh has reached the grassroots level and its success is
acclaimed globally. The major financial services of MFIs are general microcredit for small-scale
self-employment-based activities, micro-enterprise loans, loans for ultra-poor, agricultural
loans, seasonal loans, loans for disaster management and savings facility for the members.
In FY20, through 759 licensed institutions, this sector provided financial services to 33.3
million individuals and micro enterprises, an increase of 2.8 percent from FY19. In this period,
the number of employees and branches increased by 5.5 percent and 10.0 percent
respectively compared to those of FY19. Although total number of MFIs is still same compared
to FY16 after passing the last five years (FY16 to FY20), the number of members of this sector
has increased by 5.5 million during this period (Table 10.1 and Chart 10.1).
TABLE 10.1: SELECTED INDICATORS OF MICROFINANCE SERVICES

Sl. Growth based

Indicators FY16 FY17 FY18 FY19 FY20P
No. on FY19
1 Number of licensed institutions 759.0 700.0 706.0 724.0 759.0 4.8%
2 Number of branches (thousand) 16.3 17.1 18.1 19.0 20.9 10.0%
Number of employees
3 125.0 137.6 152.5 162.2 171.1 5.5%
(thousand)
4 Number of members (millions) 27.8 29.9 31.1 32.4 33.3 2.8%
5 Number of borrowers (millions) 23.1 24.8 25.7 25.8 26.2 1.6%
6 Outstanding loans (billion BDT) 458.2 581.6 671.2 787.6 889.0 12.9%
Outstanding loans in top 20
7 348.0 478.0 528.3 564.7 707.0 25.2%
institutions (billion BDT)
Savings balance held in the
8 168.7 216.1 262.4 306.2 374.0 22.1%
licensed institutions (billion BDT)
Savings balance held in top 20
9 136.0 171.4 206.8 239.0 294.8 23.3%
institutions (billion BDT)
Note: P = Provisional.
Source: Microcredit Regulatory Authority; Calculation: FSD (includes rounded up figures).

Financial Stability Report 2020 117

At end-FY20, outstanding balances of loans and savings of this sector stood at BDT 888.90
billion and BDT 373.9.0 billion respectively, which are 12.9 percent and 22.1 percent higher
than those of FY19 (Chart 10.2).

CHART 10.1: NUMBER OF LICENSED INSTITUTIONS, CHART 10.2: SAVINGS AND LOAN SCENARIO
BRANCHES, EMPLOYEES AND MEMBERS OF MFIs SECTOR
759 724 759 888.9
800 700 706
900.0 787.6
700 800.0
671.2
600 700.0

In Billion BDT
581.6
500 600.0
458.2

373.9
333
324
500.0
311
299

306.2
400
278

262.4
400.0

216.1
209
300 190
181

168.7
171

171
163

162
153

300.0
138
125

200 200.0
100 100.0
- -
FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20

Licensed Institutions No. of Branches (00)

No. of Employees (000) No of Members (00,000)
Savings Loan

Source: Microcredit Regulatory Authority; Calculation: FSD.

Chart 10.3 demonstrates that the numbers of both borrowers and members of MFIs have
been steadily increasing over time. In particular, the number of borrowers and members have
increased by 0.40 million and 0.9 million respectively in FY20 from the preceding fiscal year.
The borrowers-to-members ratio showed a declining trend in the last five fiscal year. In FY20,
the ratio was 78.5 percent which is 108 basis points lower than that of the previous fiscal year
(Chart 10.4). The fall in sector outreach might be a result of lower MFI activities due to the
COVID-19 pandemic in the second half of FY20.

CHART 10.3: TREND OF SECTOR OUTREACH CHART 10.4: BORROWERS-TO-MEMBERS RATIO

32.4 33.3 84% 83.1% 82.9%

35.0 29.9 31.1 82.6%
27.8 26.2 83%
30.0 24.8 25.7 25.8
23.1 82%
25.0
In Million

20.0 81%
79.58%
15.0 80%
10.0 78.50%
79%
5.0 78%
0.0
77%
FY16 FY17 FY18 FY19 FY20
76%
No. of Members No. of Borrowers FY16 FY17 FY18 FY19 FY20

Source: Microcredit Regulatory Authority; Calculation: FSD.

The average loans and average savings per institution showed an increasing trend over the
last five fiscal years. The average loans and average savings per institution increased by 7.7
percent and 16.5 percent respectively during FY20 from the corresponding figures of the
preceding year (Chart 10.5).
Similar trend was witnessed for per branch's growth of loans and savings. In particular, the
average loans and savings per branch were BDT 42.5 million and BDT 17.9 million respectively,
which were 2.5 percent and 10.9 percent higher than the corresponding figures of FY19 (Chart
10.6).

118 Financial Stability Report 2020

 CHART 10.5: AVERAGE LOANS AND SAVINGS PER INSTITUTION CHART 10.6: AVERAGE LOANS AND SAVINGS PER BRANCH

1,400.0 45.0
1,200.0 40.0
35.0
1,000.0

In Million BDT
30.0
In Million BDT

800.0 25.0
600.0 20.0
15.0
400.0
10.0
200.0 5.0
0.0 0.0
FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20
Loans per Institution Savings per Institution Loans per Branch Savings per Branch

Source: Microcredit Regulatory Authority; Calculation: FSD.

Chart 10.7 portrays an upward trend in average size of loans and savings per borrower and per
member in the last five fiscal years. In FY20, the average loan per borrower was 11.2 percent
higher than the previous fiscal year. Likewise, the average savings per member was 18.7
percent higher than the previous reporting period.

CHART 10.7: AVERAGE LOAN PER BORROWER AND

CHART 10.8: STRUCTURE OF MEMBERSHIP
SAVINGS PER MEMBER
40,000.0
35,000.0 40.0
30,000.0
Number in Million

25,000.0 30.0
In BDT

20,000.0

90.4%
89.9%
91.0%
20.0
91.2%
91.1%

15,000.0
10,000.0 10.0
5,000.0
0.0 0.0
FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20

Loan per Borrower Savings per member Men Women

Source: Microcredit Regulatory Authority; Calculation: FSD.

Chart 10.8 shows that MFI sector is mostly dominated by female members, and their number
is increasing steadily with 3.4 percent growth in FY20 compared to FY19. The number of male
members has reached to 3.2 million, a decrease of 1.8 percent from the preceding year. The
proportion of male members has decreased by 0.5 percentage point in FY20.
Presently, out of 30.1 million, 23.5 million female members (78.1 percent) and out of 3.21
million, 2.65 million male members (82.55 percent) are availing credit facilities from MFIs.
These figures indicate that, in aggregate, female participation in getting access to microcredit
is considerably higher than their male counterpart.

10.2 LOAN STRUCTURE

Chart 10.9 shows the distribution of outstanding loans in different loan sizes. In FY20,
disbursed loans in the ranges of BDT up to 10,000; BDT 10,001 to 30,000; BDT 30,001 to 50,000;
BDT 50,001 to 100,000; BDT 100,001 to 300,000, and above BDT 300,000 represented 2.6
percent, 18.6 percent, 22.7 percent, 22.7 percent, 21.5 percent and 11.9 percent respectively.

Financial Stability Report 2020 119

Chart 10.10 shows that the proportionate shares of total loans given in the ranges of BDT up to
10,000 and BDT 10,001 to 30,000 decreased by 1.7 percentage points and 2.9 percentage points
respectively in FY20 compared to those of FY19. On the other hand, the total loans provided in
the ranges of BDT 30,001 to 50,000; BDT 50,001 to 1,00,000; BDT 1,00,001 to 3,00,000; and above
BDT 3,00,000 increased by 0.7 percentage point, 1 percentage point, 1.1 percentage points and
1.8 percentage points respectively. Indeed, larger size of loans indicates the higher growth of
loans outstanding.
CHART 10.9: OUTSTANDING LOAN STRUCTURE IN FY20 CHART 10.10: OUTSTANDING LOAN STRUCTURAL TREND

900,000

21.5% 11.9%
21.5% 22.0% 21.7% 20.4% 10.1%
800,000
18.6% 22.7%

25.2% 22.9% 22.5% 17.1% 7.4%

2.6% 700,000

29.2% 23.0% 20.2% 16.3% 5.5%

11.9% 600,000
22.7%

22.7%
In Million BDT

36.3% 21.3% 17.5% 13.2% 4.6%

500,000
21.5%
400,000

18.6% 22.7%
300,000
200,000
100,000
7.0% 5.8% 5.0% 4.3% 2.6%
-
FY16 FY17 FY18 FY19 FY20
Up to tk.10,000 Tk.10,001 to tk.30,000 Up to tk.10,000 Tk.10,001 to tk.30,000
Tk.30,001 to tk.50,000 Tk. 50,001 to tk.100,000
Tk.30,001 to tk.50,000 Tk. 50,001 to tk.100,000
Tk. 100,001 to tk. 300,000 above tk.300,000
Tk. 100,001 to tk. 300,000 above tk.300,000

Source: Microcredit Regulatory Authority; Calculation: FSD.

Chart 10.11 shows the trend in the number of members’ borrowing loans in different loan
sizes. In FY20, 16.1 million members (6.9 percent lower than that of FY19) availed loans in the
range of BDT 10,001 to 50,000 and this segment constituted 63.9 percent of total borrowers.
Moreover, in comparison with FY19, the number of members’ borrowing in the ranges up to
BDT 10,000; BDT 10,001 to 30,000; and BDT 1,00,001 to 3,00,000 decreased by 4.6 percent, 11.6
percent and 5.7 percent respectively during FY20 (Chart 10.12). On the other hand, members’
borrowing increased by 1.4 percent, 23.4 percent and 32.3 percent in the ranges of BDT 30,001
to 50,000; BDT 50,001 to 1,00,000; and above BDT 3,00,000 respectively during this period.
These indicators reveal that households’ demand for higher amount of microcredit is
increasing over the years.

CHART 10.11: LOAN RECIPIENTS’ COMPOSITION IN FY20 CHART 10.12: LOAN RECIPIENTS’ COMPARISON
BETWEEN FY19 AND FY20
12.00 11.35
10.04
63.9% 10.00

8.00
6.05
In million

5.97
17.0% 6.00
13.3% 4.27
1.3% 4.6% 3.51 3.35 3.46
4.00

2.00 1.22
1.15
0.24
0.32
0.00
Up to tk.10,000 Tk.10,001 to tk.50,000
Up 10,000 10,001 to 30,001 to 50,001 to 100,001 to above
Tk. 50,001 to tk.100,000 Tk. 100,001 to tk. 300,000 30,000 50,000 100,000 300,000 300,000
Range In BDT
above tk.300,000
FY 19 FY 20

Source: Microcredit Regulatory Authority; Calculation: FSD.

In FY20, non-performing loan (NPL) ratio of the MFIs sector stood at 3.3 percent (Chart 10.13).
Although the ratio is moderately low compared to the NPL ratio of the banking and FIs
sectors, increasing trend of the same during the last couple of years appears to get close
attention. In FY20, total amount of non-performing loan was BDT 29.5 billion, which is BDT 5.9

120 Financial Stability Report 2020

billion higher than that of FY19 (Chart 10.14). Notably, in FY20, total outstanding loan in MFIs
sector has increased by 12.9 percent while the NPL ratio has increased by 0.3 percentage point
compared to FY19. Due to the increasing trend in the NPL ratio, adequate measures are
required for keeping the sector sound and stable in the near future.
CHART 10.13: NON-PERFORMING LOAN RATIO CHART 10.14: TREND OF NON-PERFORMING LOAN

3.5% 3.3% 29.5

30.0
3.0%
23.6
3.0% 2.7% 25.0
2.6% 18.3

In Billion BDT
In percent

20.0
2.5% 2.3% 13.6
15.0 11.8

10.0
2.0%
5.0
1.5% 0.0
FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20

Source: Microcredit Regulatory Authority; Calculation: FSD.

10.3 SOURCES OF FUNDS AND ITS COMPOSITION

Chart 10.15 indicates that aggregate fund of MFIs was BDT 1,009.3 billion at end FY20, which
was 12.7 percent higher than that of FY19. This expansion was mainly due to (i) increase in
MFIs’ equity (up by 11.4 percent from FY19); (ii) significant increase in savings of the members
of MFIs (up by 22.1 percent from FY19); (iii) increase in loans from PKSF (up by 6.0 percent from
FY19); and (iv) increase in loans from commercial banks (up by 2.1 percent from FY19).
The total fund81 of MFIs sector has
CHART 10.15: TOTAL FUND OF MFIs
increased by more than double during
the last five fiscal years. During this 1,200.0
1,009.3
period, the MFIs sector enjoyed an 1,000.0 895.2
average growth of 20 percent 755.1
800.0
approximately in total funds collection
In Billion BDT

631.1
and it is still growing significantly (12.7 600.0 495.4
percent growth was registered in
400.0
reporting year compared with previous
year). 200.0

0.0
FY16 FY17 FY18 FY19 FY20

Source: Microcredit Regulatory Authority; Calculation: FSD.

In FY20, equity, savings from members and loans from commercial banks constituted 34.2,
37.2 and 19.5 percent of total funding of the MFIs respectively. Loans from PKSF, donors’ fund,
other loans and other sources constituted 5.5 percent, 0.6 percent, 1.3 percent and 1.7
percent respectively (Chart 10.16). Marginal contribution (0.6 percent) of donors in MFIs’ Fund
demonstrates that once donor-dependent MFIs have now become almost self-reliant.

81
The total fund mainly comprises MFIs’ own capital, savings, loans from commercial banks, loans from PKSF,
donors’ fund, loans from government and others’ loans.

Financial Stability Report 2020 121

Chart 10.17 demonstrates the contribution of capital as a source of funds slightly decreased
to 34.2 percent in FY20 from 34.6 percent in FY19. During the same period, the contribution
of member savings increased to 37.2 percent from 34.4 percent. However, the contribution of
loans from commercial banks in FY20 decreased slightly to 19.5 percent from 21.6 percent in
the previous period.
CHART 10.16: MAJOR SOURCES OF FUND IN FY20 CHART 10.17: TREND OF MAJOR SOURCES OF FUND
0.6% 1.3% 1.7% 40.0%
5.5% 35.0%
30.0%
25.0%

In percent
19.5% 34.2%
20.0%
15.0%
37.2% 10.0%
5.0%
0.0%

Capital Savings Commercial Bank

PKSF Donor Fund Other Loans
Other Funds FY16 FY17 FY18 FY19 FY20

Source: Microcredit Regulatory Authority; Calculation: FSD.

10.4 FINANCIAL SUSTAINABILITY OF MFIs

Return on assets (ROA) and return on equity (ROE) are two major indicators of operational
sustainability of financial institutions. In FY20, ROA of MFIs decreased marginally to 5.0
percent from corresponding figure of 6.4 percent in FY19. ROE followed the same trend and
decreased considerably to 11.8 percent in FY20 compared to the preceding period’s figure of
17.1 percent (Chart 10.18). Notably, ROE of MFIs sector decreased due to sizeable increase of
equity (BDT 35.2 billion).
Albeit some decline in operating efficiency, donation-to-equity ratio (dependency ratio)
remained stable in FY20 compared to that of FY19 which indicates strong improvement in
self-sustainability of this sector (Chart 10.19).
CHART 10.18: OPERATIONAL SUSTAINABILITY CHART 10.19: FINANCIAL DEPENDENCY

25.0% 3.5%

3.0% 2.9%
20.0% 2.8%
21.0% 2.5% 2.5%
19.0% 19.5%
15.0%
In percent

17.1%
In percent

2.0%
1.6%
1.6%
10.0% 1.5%
6.4% 11.8%
4.4% 5.0%
1.0%
5.0% 3.1%
2.3%
0.5%

0.0%
0.0%
FY16 FY17 FY18 FY19 FY20
FY16 FY17 FY18 FY19 FY20
ROA ROE

Source: Microcredit Regulatory Authority; Calculation: FSD.

The amount of donated funds slightly increased in FY20, but the equity increased from
retained earnings and members’ savings were substantial, which are necessitated for the
long-term sustainability of this sector, and for withstanding any financial shocks.

122 Financial Stability Report 2020

The microfinance sector is highly concentrated in terms of loans, savings and number of
members in a small number of institutions. The top 10 MFIs mobilized 71.97 percent of total
savings of the members, while 71.96 percent of the MFI sector’s outstanding loans pertained
to them as of end FY20. They provided financial services to 73.3 percent of total members of
MFIs (Chart 10.20). For top 20 MFIs, the corresponding figures are 78.8, 79.5 and 77.3 percent
respectively (Chart 10.21).
The high degree of market dominance by the top MFIs indicate that their financing
activities need to be monitored closely, otherwise deterioration of their performance may
pose a threat to the stability of this sector.

CHART 10.20: CONCENTRATION OF MFI SECTOR IN TERMS CHART 10.21: CONCENTRATION OF MFI SECTOR IN
OF LOANS, SAVINGS AND MEMBERS HELD BY TOP 10 TERMS OF LOANS, SAVINGS AND MEMBERS HELD BY TOP 20

100% 100%

20.5%
21.2%

22.7%
26.7%
28.0%

28.0%

90% 90%
80% 80%
70% 70%
60% 60%
50% 50%

79.5%
78.8%

77.3%
73.3%
72.0%

72.0%

40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
Savings Loan Members Savings Loan Members
TOP 10 Others Top 20 Others

Source: Microcredit Regulatory Authority; Calculation: FSD.

MFI sector in Bangladesh was reasonably stable during FY20. During the review year, the
MFI sector did not pose any significant threat to the financial stability of the country. Although
NPL ratio of the sector compared to banking sector is fairly low, it has been increasing during
the last couple of years. For a stable and sound microfinance sector, increasing trend in NPL
ratio deserves special attention. The demand for microfinance is increasing day by day. Since
a large number of micro finance institutions are working in providing credit to the marginal
people, a borrower might take opportunity to borrow fund from multiple MFIs. If the
borrower selection and their credit needs are not made prudently, overlapping of loans of
borrowers may create credit trap in the long run, which may raise the sector's NPL ratio
further. A structured Credit Information Bureau (CIB) for MFIs and a technology-based
monitoring system may be helpful in reducing these problems.
The whole world including Bangladesh is passing a critical situation due to prolonged
shutdown of major economic activities caused by the COVID-19 pandemic. In an attempt to
revive livelihood of poor households by providing financial support, Bangladesh Bank, upon
declaration of the Government, has formed a refinance scheme of BDT 30 billion for
low-income professionals, marginal farmers and micro-enterprises out of its own fund, which
would be disbursed through the MFIs subject to fulfillment of terms and conditions with
maximum 9 percent interest rate at borrower level. The MRA took measures for facilitating
implementation of the stated scheme quickly. Now, close monitoring and intensive
supervision are required for ensuring proper end-use of the loan disbursed under the stated
package.

Financial Stability Report 2020 123

Chapter 11
DEVELOPMENTS IN THE FINANCIAL SYSTEM
During the COVID-19 pandemic, the Government along with the Bangladesh Bank and other
financial regulators came up with a series of policy supports and incentive packages to revive
the economy and to maintain soundness of the financial system. Some notable initiatives are
mentioned below:

11.1 ASSESSMENT OF FINANCIAL STABILITY BY BANGLADESH BANK

Financial Stability Department (FSD) of Bangladesh Bank (BB) has pointed out the major
strengths, risks and vulnerabilities of the financial system of Bangladesh throughout the year
2020 and has disseminated these to stakeholders through Financial Stability Report (FSR) and
Quarterly Financial Stability Assessment Report (QFSAR). In addition, FSD has published a
special report titled “Economic and Financial Stability Implications of COVID-19: Bangladesh
Bank and Government’s Policy Responses” by focusing on the impact of COVID-19 on different
sectors of Bangladesh economy with implications of those for financial stability. The seminal
publication has also discussed the incentive and policy measures of Bangladesh Bank and the
Government and has made some suggestions towards mitigating various challenges posed
by the pandemic.

11.2 REGULATIONS AND POLICIES FOR BANKING SECTOR

A) RATIONALIZATION OF RATE OF INTEREST/PROFIT OF LOANS/INVESTMENTS
For rationalizing the rate of interest/profit of all unclassified loans/investments except credit
card loans, Bangladesh Bank has advised banks vide BRPD circular no. 03 dated 24 February
2020 to set interest rate at maximum 9 percent. Besides, banks have been instructed to
postpone deducting any charges except maximum 2 percent penal interest/profit on the
overdue amount. However, the rate of interest/profit for pre-shipment export credit remains
unchanged at the prevailing 7 percent.
B) LOAN RESCHEDULING AND ONE TIME EXIT POLICY
Bangladesh Bank, vide BRPD circular letter no. 07 dated 19 March 2020, has advised banks to
classify their loans under rescheduled and one time exit policy as Special Mention Account
(SMA) category. The required provision for those loans should be calculated based on their
classification status as on 31 December 2018. Banks have been instructed to maintain 50
percent of the required provision as ‘General Provision’ and the rest amount as ‘Specific
Provision’. In addition, banks have been advised to stop transferring the maintained provision
to income account unless any recovery of loans is made.
C) STIMULUS PACKAGE FOR EXPORT ORIENTED INDUSTRIES
The Government of Bangladesh announced BDT 50 billion emergency incentive package for
payment of three months (April-June 2020) equivalent salaries and allowances to workers and
staffs of active export-oriented industries. In line with this, Bangladesh Bank issued guidelines
vide BRPD circular no. 07 dated 02 April 2020. Banks disbursed this interest free loan at 2
percent service charge. Later, the Government declared additional BDT 30 billion for them to
pay salaries and allowances to workers and staffs for the month of July 2020.

Financial Stability Report 2020 125

D) SIMPLIFICATION OF IMPORT OF ESSENTIAL CHILD FOOD
The margin of L/Cs for importing baby foods was reduced to 5 percent considering the
possibility of its supply crisis during the pandemic as per BRPD circular letter no.12 dated 04
April 2020.

E) STIMULUS PACKAGE FOR LARGE INDUSTRIES AND SERVICE SECTORS

Bangladesh government stimulus package of BDT 300 billion82 for working capital to large
industries and service sectors was enhanced to BDT 400 billion vide BRPD circular letter no. 53
dated 29 October 2020. The 50 percent funding of this working capital loan are designed to be
sourced from banks and NBFIs, whereas rest from the refinance scheme83 of Bangladesh Bank.
The banks and NBFIs were advised to provide the loan based on banker-customer relationship
at 9 percent interest rate where the Government would subsidize 4.5 percent interest and the
borrower would pay the rest. The interest rate for the refinance scheme was set at 4 percent.
F) REFINANCE SCHEME FOR PRE- SHIPMENT CREDIT
Bangladesh Bank, vide BRPD Circular No. 09 dated 13 April 2020, launched a revolving
“Pre-Shipment Credit Refinance Scheme” of BDT 50 billion for accelerating the country’s
economy by providing pre-shipment export credit to the export-oriented industries. Under this
scheme, banks can provide loans at a maximum interest rate of 6 percent and get 100 percent
refinance from the Bangladesh Bank at 3 percent rate of interest.
G) TRANSFER OF INTEREST INCOME TO BLOCKED ACCOUNT
Bangladesh Bank instructed the banks, vide BRPD circular no. 11 dated 03 May 2020 and BRPD
circular letter no. 23 dated 04 May 2020, to transfer the interest/profit accrued on
loans/investments on the balance of 31 March 2020 for the period of 01 April 2020 to 31 May
2020 to interest-free blocked account for mitigating the adverse business condition
stemming from the COVID-19 pandemic. Moreover, BB advised banks not to transfer the
interest to their earnings. Later, BB issued instructions vide BRPD circular no. 12 dated 10 June
2020 regarding the interest waiver to the customers for the month of April and May 2020 as
on balance of 31 March 2020. The borrowers are allowed full interest waiver facility up to BDT
0.1 million, 2 percent interest waiver for the credit above BDT 0.1 million to BDT 1 million and
1 percent interest waiver for the credit above BDT 1 million. Admissible amount of interest
waiver for each borrower was maximum BDT 1.2 million. The Government would reimburse
the waived amount to banks through BB as interest subsidy.
H) REVISED POLICY FOR OFFSHORE BANKING OPERATION OF THE BANKS
With a view to reducing the cost of fund and making the operation of Offshore Banking Unit
(OBU) more attractive, Bangladesh Bank amended its previous circular by issuing BRPD
Circular Letter No. 31 dated 18 June 2020 regarding the policy for Offshore Banking Operation
of banks (OBO). For OBO, banks are required to maintain minimum 2 percent Cash Reserve
Ratio (CRR) with Bangladesh Bank on bi-weekly average basis with a provision of minimum 1.5
percent on daily basis of the average total demand and time liabilities (ATDTL) of OBO,
effective from 01 July 2020. Moreover, banks can transfer up to 30 percent of their total
regulatory capital to OBU, which was 20 percent previously. Under the revised guidelines,
OBUs are allowed to lend the juristic persons not resident in Bangladesh upon compliance
with relevant requirements.

82
BRPD Circular No. 8 dated 12.04.2020.
83
BRPD Circular No. 10 dated 23.04.2020.

126 Financial Stability Report 2020

I) FIXING RATE OF INTEREST/PROFIT ON CREDIT CARD
To preserve the rights of the customers and to ensure market discipline, banks were
instructed vide BRPD circular letter no. 47 dated 24 September 2020 to charge interest/profit
on credit card at a rate not exceeding 20 percent and to charge it from the next day of the due
date of bill payment on the unpaid bill amount. On the other hand, cardholders are allowed to
withdraw maximum of 50 percent of their credit card limit as cash. Banks were instructed to
charge late payment fee only once for a bill paid after the due date.

J) DETERMINATION OF RISK WEIGHT ON INVESTMENTS IN VARIOUS SECTORS UNDER

ALTERNATIVE INVESTMENT
To encourage alternative investment in Bangladesh, BB has revised risk weight from 150
percent to 100 percent for investment under alternative investment (Private Equity, Impact
Fund etc.) including venture capital. This will remain effective till 30 September 2022 as per
BRPD circular letter no. 48 dated 29 September 2020.

K) PROVISIONING AGAINST CONSUMER LOAN

Bangladesh Bank, vide BRPD circular letter no. 52 dated 20 October 2020, advised banks to
maintain 2 percent general provision instead of 5 percent set previously against unclassified loans
of all categories under consumer financing excluding home financing to meet up the emerging
demand of consumer loan and to encourage banks' participation in this segment. In case of house
finance, the required rate of general provision remains same (i.e. 1 percent) as before.

L) LOAN CLASSIFICATION AND PROVISIONING

Under BRPD circular no.17 dated 28 September 2020 and subsequent circular letter no. 56 dated
10 December 2020, Bangladesh Bank allowed banks not to degrade the prevailing status of
loans/investments till 31 December 2020 based on classification status on 1 January 2020
considering the lower debt servicing capacity of the borrowers during the pandemic. Banks were
asked to impose or realize no penal or excess interest or fee from the borrowers during this period.
However, BB kept options for banks to receive installments from the borrowers who were willing
to pay and to upgrade their classification status according to the existing rules. BB instructed the
banks to transfer accrued interest/profit to income account after approval from competent
authority of the bank and to maintain prescribed provisions against the loans/investments. Banks
have been advised to maintain 1 percent extra provision for all unclassified loans (including SMA)
while finalizing accounts for the year ended 31 December 2020.

M) PROVIDING LOAN AND CREDIT CARD FACILITIES TO IT FREELANCERS HAVING VIRTUAL

ID CARDS
In order to flourish the freelancing sector and increase foreign currency earnings, Bangladesh
Bank has instructed all scheduled banks vide BRPD circular no. 19 dated 27 December 2020 to
provide credit facilities and credit cards to virtual ID cardholder IT freelancers subject to
compliance with banking laws and regulations.

11.3 POLICIES FOR NON- BANK FINANCIAL INSTITUTIONS (NBFIs)

A) REVISED GUIDELINES ON COMMERCIAL PAPER (CP):
BB, vide DFIM circular letter no. 02 dated 27 February 2020, has revised the “Guidelines on
Commercial Paper (CP) for Financial Institutions” to introduce some best practices and set
standards that facilitate efficient dealing of CP.

Financial Stability Report 2020 127

B) CLASSIFICATION OF LOAN/LEASE/ADVANCE
Considering the economic disruptions caused by the COVID-19 pandemic, BB directed the
NBFIs vide DFIM circular letter no. 06 dated 01 November 2020 not to change the current
status of loans/leases/advances as of 01 January 2020 till 31 December 2020 and during the
period, the respective borrower is not treated as default.

C) EXTENSION OF TERM TO MATURITY OF TERM LOANS AND LEASES FOR FINANCIAL

INSTITUTIONS
In the context of pandemic situation, BB issued instructions, vide DFIM circular letter no. 04
dated 09 August 2020, regarding the extension of maturity of the term loan/leases of FIs
which is set at maximum 50 percent of the remaining time to maturity of the loan/leases.

D) REVISION OF 'GUIDELINES ON STRESS TESTING FOR NON-BANKING FINANCIAL

INSTITUTIONS
Bangladesh Bank revised some parts of the “Guidelines on Stress Testing for NBFIs” vide DFIM
circular letter no. 09 dated 21 December 2020.

11.4 CHANGES IN MONETARY POLICY

With a view to expediting recovery of the Coronavirus pandemic-hit economy through
ensuring available less costly funds for banks and NBFIs and speeding up their efforts to
implement the Government–announced stimulus packages timely, the Bangladesh Bank cut
the following key policy rates along with declaration of the expansionary monetary policy for
FY21:

A) CASH RESERVE RATIO (CRR) FOR BANKS AND NBFIs:

Cash Reserve Ratio (CRR) for all scheduled banks was reduced from 5 percent to 4.5 percent
(daily basis) and from 5.5 percent to 5 percent (bi-weekly average basis)84on 23 March 2020,
with a further reduction to 3.5 percent and 4 percent respectively vide MPD circular no. 3
dated 09 April 2020, effective from 15 April 2020. BB also reduced the CRR of Non-Bank
Financial Institutions (NBFIs) by one percentage point for supplying additional liquidity in the
economy. Now the NBFIs are allowed, vide DFIM circular no. 03 dated 21 June 2020, to
maintain 1.50 percent on bi-weekly basis and at least 1.0 percent daily on their demand and
time liabilities as CRR.

B) REPURCHASE AGREEMENT (REPO)

REPO rate was reduced three times during the CY20. Initially it was reduced to 5.75 percent
from the existing 6 percent85. It was further reduced to 5.25 percent86. Later it was reduced to
4.75 percent vide MPD circular no. 05 dated 29 July 2020.

C) REVERSE REPO
Reverse REPO was reduced to 4 percent from 4.75 percent through MPD circular no. 05 dated
29 July 2020 for rationalizing the policy rates’ corridor (the gap between the REPO and reverse
REPO rates).

84
MPD circular No. 1 dated 23.03.2020.
85
MPD circular No. 02 dated 23.03.2020.
86
MPD circular No. 04 dated 09.04.2020.

128 Financial Stability Report 2020

D) BANK RATE
Bank rate was fixed at 4 percent from the existing 5 percent after 17 years vide MPD circular
no. 06 dated 29 July 2020 for rationalizing bank rate with the current interest rate regime.
E) MONETARY POLICY STATEMENT FOR THE FISCAL YEAR 2020-2021
On 29 July 2020, BB unveiled an ‘expansionary and accommodative’ monetary policy for the
FY21 for reinstating economic activities to normalcy and keeping the inflation level under
control. Targets for private sector and public sector credit growth were set at 14.8 percent and
44.4 percent respectively.

11.5 DEVELOPMENTS IN AGRICULTURAL AND RURAL CREDIT

A) REFINANCE SCHEME FOR AGRICULTURE SECTOR
Bangladesh Bank, vide ACD circular no. 01 dated 13 April 2020, formed a refinance scheme of
BDT 50 billion from its own fund for horticulture, fisheries, poultry, dairy and livestock to
minimize the impact of COVID-19 and to revive the agricultural activities as well as the
economy of the country. Under the scheme, the farmers/farms get credit at 4 percent interest
rate from the banks and the banks get refinance at 1 percent interest rate from BB.
B) AGRICULTURAL LOAN AT CONCESSIONAL INTEREST RATE
In order to ensure enhanced production and supply of food grains amid the COVID-19
pandemic, Bangladesh Bank issued ACD circular no. 02 dated 27 April 2020 for lowering the
interest rate of agricultural loan for all crops and grains at borrower level to 4 percent from 9
percent effective from 01 April 2020 to 30 June 2021. Bangladesh Bank subsidizes the
remaining 5 percent interest to banks.
C) AGRICULTURAL AND RURAL CREDIT POLICY AND PROGRAM FOR THE FY21-22
In line with the Government’s agricultural policy and for dealing with the impacts of
Coronavirus on the rural economy, BB, vide ACD Circular No. 03 dated 22 July 2020, declared
the agricultural and rural credit policy and program of BDT 262.92 billion for the FY21 which
is 8.99 percent higher than the previous fiscal year’s credit program.
D) AGRICULTURAL LOAN FACILITY FOR THE FLOOD AFFECTED FARMERS
BB advised the scheduled banks vide ACD circular no. 04 dated 23 July 2020 for providing
agricultural loan facilities to the flood-affected farmers whose crops were damaged by the
floods in different districts. BB also instructed the banks for the postponement of collection of
agricultural loan, rescheduling those with easy down payment and stop the legal procedure
against collection of defaulted loan.
E) STRENGTHENING AGRICULTURAL LOAN DISBURSEMENT AMONG THE THREE HILL
TRACT PEOPLE
BB instructed banks vide ACD circular letter no. 01 dated 29 July 2020 to enhance agricultural
credit to farmers (both general and jhum farmers) working in Chattogram hill tract areas
(Khagrachari, Rangamati, Bandarban). Banks were also instructed to open account of jhum
farmers at BDT 10, disburse loan at 4 percent interest for the cultivation of ginger, turmeric,
black pepper, cassia leaf etc.

Financial Stability Report 2020 129

11.6 DEVELOPMENTS IN COTTAGE, MICRO, SMALL AND MEDIUM ENTER-
PRISE (CMSME) FINANCING
A) FINANCIAL INCENTIVE PACKAGE FOR COTTAGE, MICRO, SMALL AND MEDIUM
ENTERPRISE (CMSME) SECTOR
The Government announced stimulus package of BDT 200 billion for the CMSME sector of
Bangladesh during the pandemic which is distributed by the banks and NBFIs as a loan
(SMESPD circular no. 01 dated 13 April 2020). The 50 percent loan is provided from the own
source of banks and NBFIs at 9 percent interest rate of which entrepreneurs are required to pay
4 percent and the rest 5 percent is reimbursed by the Government as interest subsidy. The rest
50 percent of the fund is provided from the refinance scheme of BB87. BB refinances their
disbursed loan at 4 percent interest rate.
B) EXPANSION OF VARIOUS REFINANCE SCHEMES OF COTTAGE, MICRO, SMALL AND
MEDIUM ENTERPRISES (CMSME) SECTOR
BB, vide SMESPD circular letter no. 02 dated 07 May 2020, has enhanced the fund size of the
three refinancing schemes from its own source along with relaxation of interest rate and
conditions for patronizing and aiding the Coronavirus hit Cottage, Micro, Small and Medium
Enterprises (CMSMEs). The size of the “Small Enterprise Refinance Scheme”, the “Refinance
Scheme for Setting up Agro-based Product Processing Industries in Rural Areas” and the
“Refinance Scheme for New Entrepreneurs in Cottage, Micro and Small Enterprise Sector” have
been increased from BDT 8.5 billion to BDT 15 billion, from BDT 7 billion to BDT 14 billion and
from BDT 0.50 billion to BDT 1 billion respectively. Under these schemes, banks and financial
institutions get loans at 3 percent interest rate from BB and distribute them among the
borrowers at 7 percent interest rate.
C) CREDIT GUARANTEE SCHEME FOR COTTAGE, MICRO AND SMALL ENTERPRISES
The Credit guarantee Scheme (CGS) of BDT 20 billion has been set up by Bangladesh Bank vide
SMESPD circular no. 03 dated 27 July 2020 for the Cottage, Micro and Small enterprises (CMS)
that are facing difficulties to obtain loan/investment from banks and NBFIs due to inadequate
collateral. Subsequently, a manual of Credit Guarantee Scheme has been published88. The
disbursed amount from the stimulus package of BDT 200 billion for the CMSME sector is
covered under this scheme. Subject to having adequate funds, participating banks and financial
institutions get maximum 30 percent portfolio guarantee cap against their stipulated portfolio
limit for working capital loans/investment in CMS sector. Under the said portfolio guarantee
cap, a single entrepreneur or borrower/investor get up to a maximum of eighty (80) percent
guarantee coverage. Regardless of the existing limit for loan/investment, the amount of
loan/investment facility for guarantee under the scheme is a minimum of BDT 0.20 million and
a maximum of BDT 5 million.
D) LOAN CLASSIFICATION AND PROVISIONING FOR COTTAGE, MICRO AND SMALL
CREDITS UNDER CMSME
The Loan classification and provisioning policy for Cottage, Micro, Small and Medium
Enterprises (CMSME) was relaxed vide BRPD circular no. 16 dated 21 July 2020 to encourage
bank lending in this sector.

87
SMESPD Circular No. 02 dated 26.04.2020.
88
SMESPD Circular No.-04 Dated 03/11/2020.

130 Financial Stability Report 2020

E) PRE-FINANCE CREDIT FACILITY UNDER SUPPORT SAFETY RETROFITS AND
ENVIRONMENTAL UPGRADES IN THE BANGLADESH READY-MADE GARMENTS SECTOR
PROJECT (SREUP)
Pre-finance credit facility is offered to eligible RMG factories vide SMESPD circular letter no. 15
dated 19 November 2020 under social upgradation of SREUP for improving the
safety/healthy/hygienic facility of workers and workplace environment to overcome the
COVID-19 pandemic situation.

11.7 DEVELOPMENTS IN FOREIGN EXCHANGE REGULATIONS/TRANSACTIONS

A) SPECIAL EXPORT SUBSIDY TO RMG/ TEXTILE SECTOR
BB instructed all Authorized Dealers (ADs) vide FE circular no. 01 dated 07 January 2020 for
giving special cash incentive to readymade garments (RMG)/textile sector in line with the
Government decision. Exporters of readymade garments (RMG)/textile products (including
terry towel and specialized textile) would get 1 percent cash incentive on net FOB value
against their export.
B) FOREIGN EXCHANGE TRANSACTIONS FOR IT/SOFTWARE FIRMS
Bangladesh Bank, vide FE circular no. 02 dated 13 January 2020, enhanced the limit of
outward remittance to USD 40,000 from USD 30,000 including international card facility up to
USD 8,000 for IT/Software firms who are members of BASIS to meet their bona fide business
expenses in a calendar year.
C) EXPORT SUBSIDY AGAINST EXPORT OF RICE
BB decided through FE circular no. 05 dated 30 January 2020 that 15 percent export subsidy
would be provided to rice exporters for the fiscal year 2019-2020. To get the subsidy, they
must process rice in their local firms by collecting domestically produced paddy.
D) IMPORT AND EXPORT OF CURRENCY NOTES
Bangladesh Bank, vide FE circular no. 06 dated 03 February 2020, enhanced the limit of both
foreign currency brought in without declaration to the Customs Authorities and taken out
while proceeding abroad by a concerned person from USD 5,000 or its equivalent to USD
10,000 or its equivalent.
E) ENHANCEMENT OF LOAN LIMIT FROM EXPORT DEVELOPMENT FUND (EDF)
The limit of foreign currency financing to manufacturer-exporters for input procurement was
enhanced from USD 15 million to USD 20 million for member mills of BKMEA (Ref: FE circular
no. 09 dated 25 February 2020).
F) ADVANCE PAYMENT AGAINST IMPORTS OF LIFE SAVING DRUGS ETC
ADs were allowed to effect advance payment up to USD 500,000 or equivalent other foreign
currency without repayment guarantee for import of Coronavirus related life-saving drugs,
medical kits/equipment and other essential medical items till 30 September 2020 (Ref: FE
circular no. 15 dated 23 March 2020).
G) IMPORT OF INDUSTRIAL RAW MATERIALS – EXTENSION OF USANCE PERIOD
For minimizing the COVID-19 pandemic related disruptions to input imports by industrial
importers, the ADs were allowed to extend the usance period up to a maximum of 360 days

Financial Stability Report 2020 131

instead of prevailing 180 days depending on the actual needs of their concerned clients (Ref:
FE circular no. 16 dated 23 March 2020).

H) INTEREST RATE ON BORROWING FROM EXPORT DEVELOPMENT FUND (EDF)

To facilitate export trade during the COVID-19 pandemic, Bangladesh Bank reduced the
interest rate on borrowing from Export Development Fund (EDF). As per FE circular no. 18
dated 07 April 2020, interest rate on EDF loan facilities to ADs by BB was 1.00 percent per
annum (pa), while manufacturer-exporters were charged 2.00 percent pa by ADs. The interest
rate chargeable to eligible borrowers was further reduced to 1.75 percent pa till 31 March
2021. In accordance, ADs will pay interest payments to Bangladesh Bank at 0.75 percent pa;
the remainder 1 percent pa as before is retained by ADs as their interest income89.

I) REFINANCING FOR IMPORTS AGAINST USANCE BACK-TO-BACK L/Cs

For facilitating exporters in minimizing COVID-19 pandemic related disruptions, ADs, vide FE
circular no. 19 dated 12 April 2020, are allowed to seek refinancing facilities from Export
Development Fund (EDF) for settlement of import payments against back-to-back L/Cs under
suppliers/buyers credit depending on the actual situation for which extension of usance
period/refinancing for extendable tenure was not available. The tenure of refinancing
facilities will not exceed 180 days (maximum). Interest rate and other instructions regarding
EDF loan are also applicable for this refinancing facilities.

J) INTRODUCTION OF EURO IN GREEN TRANSFORMATION FUND(GTF)

BB, vide FE circular no. 20 dated 15April 2020, introduced EUR0 200 (two hundred) million
Green Transformation Fund (GTF) along with the existing USD 200 (two hundred) million to
set up environment friendly manufacturing infrastructure. Financing on long term basis (5 to
10 years) from GTF in Euro is admissible to all manufacturing industrial enterprises for
importing of environment friendly and energy efficient/green capital machinery and
accessories.

K) WORKING CAPITAL LOANS FROM ABROAD BY FOREIGN OWNED/CONTROLLED

COMPANIES
As an effort to alleviate disruptions induced by the COVID-19 pandemic, all foreign
owned/controlled companies operating in Bangladesh were allowed, vide FE circular letter
no. 19 dated 03 May 2020, access to short-term working capital loans, with tenure of one-year
and extendable to another one year, from their parent companies/shareholders abroad for
ease of payment of 3-month wages and salary to staffs regardless of their length of
engagement in manufacturing or services output activities. This facility remained valid till 31
December 2020 vide FE circular letter no. 28 dated 29 July 2020.

L) CASH INCENTIVES AGAINST REMITTANCE SENT IN LEGITIMATE WAY

Expatriate Bangladeshis, vide FE circular letter no. 20 dated 12 May 2020, were granted 2
percent incentives on remittance up to USD 5,000 requiring them to show no paper while for
remittance more than USD 5,000, necessary papers required to be submitted within 2 months
instead of previous 15 days.

89
FE circular no. 47, dated 28 October 2020.

132 Financial Stability Report 2020

M) ENHANCEMENT OF LOAN LIMIT FROM EXPORT DEVELOPMENT FUND (EDF)
BB enhanced the refinancing loan limit from USD 25 million to USD 30 million from EDF by the
ADs against their foreign currency financing to member mills of BGMEA and BTMA for input
procurement vide FE circular no. 21 dated 17 May 2020.
N) ISSUANCE OF LETTER OF CREDITS (L/Cs) WITH REALIZATION CLAUSE
For facilitating export trade during the COVID-19 pandemic, opening of back-to-back L/Cs or
usance L/Cs for input procurement were allowed with realization clause along with some
provisions by the ADs on behalf of the exporters operating outside specialized zones. [Ref.: FE
circular letter no. 22 dated 11 June 2020]
O) DISCOUNTING OF DIRECT AND DEEMED EXPORT BILLS IN FOREIGN EXCHANGE OUT
OF OWN SOURCES
ADs were allowed vide FE circular no. 23 dated 21 June 2020 to discount usance export (direct
and deemed) bills in foreign exchange from their own sources to facilitate smooth
transactions, provided that the fund is not committed for otherwise use.
P) EXPORT UNDER OPEN ACCOUNT CREDIT TERMS AGAINST PAYMENT UNDERTAKING/
PAYMENT RISK COVERAGE WITH OPTION OF EARLY PAYMENT ARRANGEMENT ON
NON-RECOURSE BASIS
For facilitating exporters’ access to financing easily, ADs are allowed vide FE circular no. 25,
dated 30 June 2020 to ship goods on sales contracts in favour of exporters under open
account credit terms within the statutory period, if otherwise not extended, from the date of
shipment, subject to compliance with several instructions under FE guidelines.
Q) TRANSACTIONS RELATING TO FOREIGN DIRECT INVESTMENT IN BANGLADESH
For bringing smooth operations relating to foreign investment in Bangladesh, dividends
payable to foreign shareholders were allowed to be credited to their FC accounts maintained
in Bangladesh, subject to observance of relevant instructions. [Ref.: FE circular no. 26, dated 07
July 2020]
R) EXPORT SUBSIDY AGAINST THE EXPORT OF LIGHT ENGINEERING PRODUCTS IN
ADVANCE TT
BB, vide FE circular no. 27 dated 14 July 2020, allowed light engineering industry to get
subsidy against export proceeds through advance TT.
S) ACCESS TO FINANCE FROM DOMESTIC SOURCES AGAINST OVERSEAS GUARANTEES
As per FE circular letter no. 26 dated 21 July 2020, banks/NBFIs are allowed to extend
admissible BDT finance against overseas guarantees (preferable bank guarantee/standby
letters of credit) to resident companies irrespective of ownership/controlling status subject to
adherence to all applicable credit and prudential norms and observance of relevant
conditions.
T) OUTWARD REMITTANCES ON ACCOUNT OF SHIPMENT TRACKING CHARGES
ADs are allowed vide FE circular no. 31 dated 26 July 2020 to send remittances on account of
shipment tracking charges subject to observance of necessary due diligence.

Financial Stability Report 2020 133

U) DEPOSIT PRODUCTS FOR NON- RESIDENT BANGLADESHIS (NRBs) WORKING ABROAD
To encourage NRBs in saving their hard-earned income in Bangladesh, ADs are advised vide
FE circular no. 32, dated 9 August 2020 to introduce deposit products in BDT for NRBs.
V) INVESTMENT IN ‘OPEN-END MUTUAL FUND’ BY NON-RESIDENT INVESTORS
(FOREIGNERS AND NRBs) THROUGH NITAs
To enhance the scope for foreign portfolio investment in stock market, balances held in
Non-resident Investor’s Taka Accounts (NITAs) can be used to purchase units of open-end
mutual funds as ‘over the counter (OTC) products’ subject to compliance with relevant
instructions. [Ref.: FE circular no. 33, dated 20 August 2020]
W) EXPORT SUBSIDY FOR SME IN TEXTILE/RMG SECTORS
Export-oriented SMEs which use both local and foreign fabric/textile in their exported
products are allowed, vide FE circular no. 35 dated 25 August 2020, to get cash subsidy on
local value addition subject to addition of minimum 30 percent local value.
X) REPATRIATION OF ROYALTY, TECHNICAL KNOW-HOW AND TECHNICAL ASSISTANCE
FEES OF INDUSTRIAL ENTERPRISES IN DOMESTIC PROCESSING AREAS (DPAs) OF
ECONOMIC ZONES (EZs)
For facilitating transactions of meeting foreign payment obligation, ADs are allowed, on
behalf of industrial enterprises in DPAs of EZs, to effect outward remittance on account of
royalty, technical know-how and technical assistance fees from taka account subject to
compliance with the instructions vide FE circular no. 41 dated 4 October 2020.
Y) IMPORT OF GOLD JEWELLERY
The import of gold jewelry is required to be executed by Authorized Gold Dealers (AGDs)
within the purview of the Gold Policy, 2018. [Ref.: FE circular no. 46, dated 21 October 2020]
Z) BUSINESS-TO-CONSUMER EXPORT THROUGH SALES ORDERS RECEIVED ON INTERNET
To bring wider scope for Business-to-consumer export, ADs are instructed vide FE circular no.
52 dated 21 December 2020, to allow such exports of each sale on e-Commerce website up to
USD 500 or equivalent under cash on delivery/payment on shipment terms.

11.8 PROGRESS IN PAYMENT SYSTEMS

A) ENSURING ACCESS TO INFORMATION OF THE TRANSACTION THROUGH MFS AND
PROVIDING NECESSARY ASSISTANCE
All MFS providers were advised through PSD circular letter no. 02 dated 09 February 2020 to
provide detailed information of digital money receipts of every cash in/out of the MFS
accounts as required by the Anti Corruption Commission (ACC) for enquiry/investigation and
to ensure real time information of the MFS customers and transactions from the data
warehouse. They are also advised to take proper steps to create awareness to prevent unusual
transactions through multiple accounts.
B) TO RESTRAIN FROM GIVING BANKING SERVICES TO UNAUTHORIZED INSTITUTIONS
THAT PROVIDES PAYMENT SERVICES AS PSP/PSO
Bangladesh Bank instructed all the scheduled banks/Mobile Financial Service (MFS)
Providers/Payment Service Providers (PSP)/Payment System Operators (PSO), vide PSD
circular no. 01 dated 05 March 2020, to refrain from operating custodian account,

134 Financial Stability Report 2020

trust-cum-settlement account or providing other forms of banking services in favour of
institutions dealing with mobile/electronic wallets, serving as PSOs or providing other forms
of payment services without getting license from Bangladesh Bank.
C) CONTINUATION OF UNINTERRUPTED BANKING AND PAYMENT SERVICES
BB instructed all banks, MFS, PSP vide PSD circular no. 02 dated 19 March 2020 to ensure
uninterrupted banking and payment services during the COVID-19 pandemic. Preparation of
business continuity plan, availability of money supply for smooth transaction, encouragement
of electronic fund transfer for ensuring proper monitoring and cyber security and health issues,
enhancement of daily/monthly transaction limit, waiver of different charges etc. are some of the
major instructions to be duly complied with.
D) GUIDELINES FOR WHITE LABEL ATM AND MARCHANT ACQUIRING SERVICES
To spread ATM (Automated Teller Machine) and POS (Point of Sales) services in the rural part of
the country, BB allowed non-bank private sector entities for setting up necessary infrastructure
for providing services to the customers of banks, MFSs, PSPs and any other institutions as
approved by BB. In this connection, BB issued “Guidelines for White Label ATM and Merchant
Acquiring Services” vide PSD circular no. 5 dated 31 May 2020.
E) REFIXING THE TRANSACTION LIMIT OF INTERNET BANKING FUND TRANSFER
THROUGH NPSB
BB, vide PSD circular letter no. 11 dated 6 September 2020, enhanced the transaction limit of
internet banking fund transfer through National Payment Switch Bangladesh (NPSB). In case of
a person, the maximum limit of daily transaction, each transaction and number of transactions
in a day have been set at BDT 5,00,000; BDT 1,00,000; and 10 respectively while the same for an
institution have been fixed at BDT 10,00,000; BDT 2,00,000; and 20 respectively.
F) INTEROPERABILITY BETWEEN BANKS AND MFS PROVIDERS THROUGH NATIONAL
PAYMENT SWITCH BANGLADESH (NPSB)
For digitizing and modernizing the payment systems of Bangladesh and decreasing the
dependency on cash transactions, BB, vide PSD circular no. 7 dated 22 October 2020, has
introduced interoperable transaction between banks and MFS providers through NPSB.
Charge for fund transfer between two MFS providers is set at 0.80 percent of the transaction
amount. In case of fund transfer from bank account to MFS account and vice versa, MFS
providers are instructed to provide charge to the respective bank at 0.45 percent of the
transaction amount.
G) BANGLADESH ELECTRONIC FUNDS TRANSFER NETWORK (BEFTN) OPERATING RULES
Bangladesh Electronic Funds Transfer Network (BEFTN) Operating Rules has been reviewed
further with a view to facilitating the banks in implementing the guidelines in line with the
upgraded BACH-II system. All scheduled banks participating in Bangladesh Automated
Clearing House (BACH) is advised vide PSD circular no. 8 dated 28 October 2020 to follow the
newly adopted “BEFTN Operating Rules Version 2.0”.
H) INTRODUCTION OF PERSONAL RETAIL ACCOUNTS
Bangladesh Bank issued rules vide PSD circular no. 9 dated 16 November 2020 to open
personal retail accounts for small/floating entrepreneurs, service providers engaged in
marginal professions and for sellers/service providers using the social media with an aim to
digitize and institutionalize the retail transactions at mass level.

Financial Stability Report 2020 135

11.9 DEVELOPMENTS IN OFF-SITE SUPERVISION
A) CREATION OF SPECIAL FUND FOR CAPITAL MARKET AND FORMULATION OF
INVESTMENT POLICY
In an attempt to ease the liquidity crunch in the stock market, Bangladesh Bank instructed all
scheduled banks vide DOS Circular no. 1 dated 10 February 2020 to form a special fund of BDT
2.0 billion for investment in the stock market by their own portfolio or their stock market
subsidiaries (merchant banks and dealer licensed brokerage houses) and other merchant
banks and brokerage houses (dealer).They are allowed to form the fund with their own
resources/fund received from BB through repo/refinancing mechanism. Such investments
will not be included in the bank’s capital market exposures and no provision will be required
to maintain for these. This facility will remain valid till February 2025.
B) CHANGE IN ADVANCE-DEPOSIT RATIO (ADR) AND INVESTMENT-DEPOSIT RATIO (IDR)
OF BANKS
BB, vide DOS circular no. 2 dated 12 April 2020, increased the Advance-Deposit Ratio (ADR) for
conventional banks to 87 percent from 85 percent and Investment-Deposit Ratio (IDR) for
Islamic banks to 92 percent from 90 percent effective from 15 April 2020. This enhancement
aims to facilitate banks in the implementation of various stimulus packages taken to revive
the economy from the deadly effects of the COVID-19 by increasing their capacity of credit
supply.
C) RESTRICTION ON DIVIDEND DISTRIBUTION
BB instructed the banks vide DOS Circular no. 03 dated 11 May 2020 not to distribute cash
dividend of the year 2019 before 30 September 2020 for preserving their liquidity health
through enhancing capital amidst the Coronavirus pandemic. In this connection, a guideline
for dividend distribution has been issued by BB. Later, BB relaxed the rules for the individual
investors to protect their interest allowing dividend distribution to them before 30 September
202090.

11.10 POLICY AND ACTIONS TAKEN ON DEBT MANAGEMENT

A) TRANSACTION OF GOVERNMENT SECURITIES:
To ease liquidity condition of all scheduled banks and NBFIs, BB allowed them to sell excess
government securities to BB after maintaining their required Statutory Liquidity Reserves
(SLR) vide DMD Circular no. 01 dated 22 March 2020.
B) INTRODUCTION OF TERM (360 DAYS) REPO
BB introduced a special REPO with tenure of 360 days vide DMD Circular no. 2 dated 13 May
2020 to match with the higher period of loans under different stimulus packages.
C) INTRODUCTION OF SUKUK
In order to open an investment window for the investors who are not interested or not in a
position to invest in the interest-bearing T-bills, bonds and other government securities,
Ministry of Finance issued “Bangladesh Government Investment Sukuk Guidelines, 2020” on
08 October 2020 through a gazette notification and subsequently, BB circulated this vide
DMD Circular no. 05 dated 21 October 2020.

90
DOS Circular Letter no. 19 dated 07.06.2020.

136 Financial Stability Report 2020

D) SELECTION OF BENCHMARK GOVERNMENT SECURITIES AND TWO-WAY PRICE QUOTING
BB issued guideline for determining benchmark treasury bonds from existing multiple terms
treasury bonds vide DMD Circular no. 6 dated 10 November 2020. Thirty bonds in six classes
have been selected as benchmark securities. To determine the secondary market-based yield,
all primary dealers have been instructed to quote two-way price through increasing
transaction of benchmark securities. It facilitates to make the government securities market a
vibrant one and to build market based effective yield curve in due course.

11.11 POLICIES FOR SUSTAINABLE FINANCE

A) REFINANCE SCHEME FOR ENVIRONMENT FRIENDLY PRODUCTS/ INITIATIVES/PROJECTS
The amount of fund under refinance scheme for environment friendly product, initiatives and
project have been increased to BDT 4.0 billion from BDT 2.0 billion vide SFD circular No. 02
dated 30 April 2020 considering the increasing demand. In line with this, the area of the
product, initiatives and projects have also been increased quantitatively and qualitatively.
B) ALLOCATION OF CSR BUDGET FOR HEALTH SECTOR
BB instructed the banks through SFD circular letter no. 03 dated 16 June 2020 to spend 60
percent of their CSR fund for health sector to tackle the deadly effects of the COVID-19
pandemic. In addition, they were advised to extend cooperation by donating important
medical equipment such as PCR machines, ventilators and oxygen cylinders as well as
personal protective gears for health professionals and even take necessary steps to extend
this co-operation at district level.
C) GUIDANCE NOTE FOR ON-LENDING/REFINANCING UNDER GREEN TRANSFORMATION
FUND (GTF)
A “Guidance Note” has been issued through SFD circular No. 04 dated 28 July 2020 for
endorsing ‘green transformation’ of machines and accessories under Green Transformation
Fund (GTF). It is used by all Participatory Financial Institutions (PFIs) for availing
on-lending/refinancing facility from this fund.
D) SUSTAINABLE FINANCE POLICY FOR BANKS AND FINANCIAL INSTITUTIONS
In line with Government’s global commitment for sustainability, BB issued ‘Sustainable
Finance Policy’ for banks and financial institutions vide SFD circular No. 5 on 30 December
2020.
E) METHODOLOGY OF SUSTAINABILITY RATING FOR BANKS AND FINANCIAL INSTITUTIONS
BB, vide SFD circular No. 06 dated 31 December 2020, issues a detailed Methodology of
Sustainability Rating for banks and financial institutions (FIs) to evaluate the performance of
banks and FIs in implementation of instructions stipulated in the ‘Sustainable Finance Policy’
annually. This rating includes their performance in four major components: (i) Sustainable
Finance Indicators, (ii) CSR Activities, (iii) Green Refinance; and (iv) Core Banking Sustainability.

Financial Stability Report 2020 137

11.12 INITIATIVES FOR FINANCIAL INCLUSION
REFINANCE SCHEME FOR THE COVID-19 AFFECTED LOW INCOME PROFESSIONALS,
FARMERS AND SMALL BUSINESSES
BB launched a refinance scheme of BDT 30 billion to generate sufficient income for the
COVID-19 affected low income professionals, farmers and micro/small businesses vide FID
Circular No. 01 dated 20 April 2020. This facility is being implemented through Micro Finance
Institutions (MFIs). Banks get the fund from BB at 1 percent interest, while they lend it to MFIs
at 3.5 percent and finally MFIs disburse loan to the affected groups at maximum 9 percent
interest.

11.13 BFIU’S INITIATIVES TO MAINTAIN THE STABILITY OF THE FINANCIAL

SYSTEM
A) GUIDELINES ON “ELECTRONIC KNOW YOUR CUSTOMER” (E-KYC)
Bangladesh Financial Intelligence Unit (BFIU), vide BFIU circular no. 25 dated 08 January 2020,
issued a ‘‘Guidelines on Electronic Know Your Customer (e-KYC)’’ for all of the financial market
participants including banks, FIs, capital market intermediaries, insurance companies, MFS,
DFS and other companies licensed by BB for enhancing their service capacity by reducing cost
and time and to achieve steady business growth. This initiative aims to assist prevention of
money laundering and terrorist financing.
B) INSTRUCTIONS TO PREVENT MONEY LAUNDERING, TERRORIST FINANCING AND
PROLIFERATION FINANCING
In line with the Money Laundering Prevention Act, 2012 and Anti Terrorism Act, 2009, BFIU has
issued a set of directives for all scheduled banks vide BFIU circular no. 26 dated 16 June 2020
for preventing the money laundering, terrorist financing and proliferation financing.
C) SIGNING MOU WITH DIFFERENT COUNTRIES
During the year 2020, BFIU has signed Memorandum of Understanding (MoU) with 5 Financial
Intelligence Units (FIUs) of different countries. With these 5 MoUs, BFIU has completed signing
total 77 MoUs with the FIUs of different countries till date. These MoUs have facilitated sharing
of information related to money laundering and terrorist financing with other FIUs around the
world.

11.14 DEVELOPMENT IN CREDIT INFORMATION

A) INITIATIVE TO ALLOW BORROWERS TO HAVE THEIR OWN CIB REPORT
In order to allow borrowers (individuals and institutions) to have their own CIB report, an
initiative has been taken to amend chapter IV of Bangladesh Bank Order, 1972. A draft of
chapter IV has been prepared by incorporating some sub-articles to the chapter IV. Besides,
amendment of some existing sub-articles has also been proposed. After taking legal opinion,
the draft has been sent to the Ministry of Finance for further necessary actions.
B) INITIATIVE TO DEVELOP A COLLATERAL INFORMATION SYSTEM
CIB has started developing a Collateral Information System to prepare a Collateral Database of
immovable assets (Land, Flat, Building and Capital Machineries). In this database, information
on collateral that is mortgaged against sanctioned loans/advances of banks/non-bank

138 Financial Stability Report 2020

financial institutions (NBFIs) will be stored. The main purpose of developing such a system is
to prevent fraud/forgery arising from mortgaging unlawfully the same property against new
loans sanctioned by banks/FIs.

11.15 SECURITIES LAWS/ORDER/NOTIFICATION/DIRECTIVE/GUIDELINE ISSUED

BY BANGLADESH SECURITIES AND EXCHANGE COMMISSION (BSEC)
The BSEC issued a number of securities laws/order/notification/directive/guideline during the
year 2020. Some of the key initiatives are as follows:
i An instruction was issued on 19 March 2020 regarding fixation of floor price and the
lowest limit of circuit breaker of any listed security in the stock market. Floor price and
the lowest limit of circuit breaker would be the average of the closing prices of five
preceding trading days from 19 March 2020 for that security.
ii For submitting monthly reports by merchant banker, institutional broker, asset
manager, custodian and credit rating companies to the BSEC through their websites,
the BSEC has introduced an online report submission platform.
iii On 22 June 2020, the BSEC advised both Stock Exchanges to launch an integrated
online data-gathering, information submission and dissemination platform following
the philosophy of “Digital Bangladesh” to ensure listing related compliances of issuer
companies such as applications, shareholding reports, declarations, corporate
actions, financial disclosures, publication, price sensitive information submission,
complaint settlement and other compliances.
iv On 01 September 2020, the BSEC issued directive stipulating some restrictions on “Z”
category companies listed in the Stock Exchange regarding buy, sell, transfer and
transmission of directors’ share, reconstruction of Board, appointment or selection of
Observer, appointment of Auditor etc.
v BSEC issued a directive on 06 September 2020 with an aim to enhance transparency
in the disclosure of financial reports of mutual fund and asset management
companies.
vi A directive was issued determining maximum limit of margin loan on 21 September
2020.
vii On 10 December 2020, a decision was taken to appoint 02 (two) independent
directors in the Board of Directors of a listed company, which would fail to comply
with the directives of maintaining minimum 30 percent of joint shareholding by
sponsor(s)/director(s).
viii To encourage the opening of digital BO account up to Union Parishad within the
country and establishing digital booth outside the country, a directive was issued on
13 December 2020.
ix On 28 December 2020, the BSEC issued a directive on an exit plan for de-listing
companies from the stock exchanges, which are failed to pay dividend due to weak
financial base or are not in commercial operation, subject to payment of dues to
general investors by those companies.

Financial Stability Report 2020 139

11.16 DEVELOPMENTS IN MICRO CREDIT OPERATIONS
Microcredit Regulatory Authority (MRA) has taken different measures for development in
micro credit operations during the year 2020. Some of the key initiatives are as follows:
i The rate of service charge of the microfinance was reset to maximum 24 percent
instead of maximum 27 percent.
ii For preventing the poor borrowers from the adverse situations caused by the
pandemic, MRA suspended all kinds of loan collection and loan classification. MFIs
were also directed to continue loan disbursement, repayment of savings and
remittance services to their clients during the pandemic.
iii During the pandemic period, MFIs were advised to avoid conventional group
meetings/yard meetings as well as provide services at the customer level using digital
platforms as much as possible.
iv A Monitoring Cell of nine (9) members headed by a Director was formed to supervise
the COVID-19 situation of the microfinance sector round the clock.
v In order to combat COVID-19 situation, MRA also advised MFIs to conduct various
social activities including distribution of various medical supplies and relief, free
health care and awareness programs among the poor people including the affected
clients with their own fund.

11.17 DEVELOPMENTS IN INSURANCE SECTOR

The Insurance Development and Regulatory Authority (IDRA) took different initiatives during
the year 2020 towards forming an inclusive insurance sector:
i First March would be performed in each year as “National Insurance Day” to increase
awareness among mass people regarding insurance. Honorable Prime Minister
inaugurated the first National Insurance Day at Bangabandhu International
Conference Centre on 01 March 2020.
ii In order to promote the actuarial profession, IDRA in co-ordination with the FID made
a plan and a fund of BDT 10 million was allocated in the budget of FY21.
iii In order to protect agriculture from adverse impact of climate change, initiatives were
taken to introduce crop insurance which will facilitate to ensure farmer’s financial
security and food safety of the country.
iv Initiatives were taken for digitalization in insurance sector.
v “Bangladesh Insurance Sector Development Project” for BDT 6320 million was under
implementation with the assistance of Government and the World Bank.
vi Considering the COVID-19 situation, the insurers were advised to extend grace period
of re-newer premium payment date, allow customer to avail re-insurance facility
without charging late fee as well as not closing their policy.

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Published by G.M. Abul Kalam Azad, General Manager, Department of Communications
and Publications, Bangladesh Bank, Head Office, Motijheel, Dhaka-1000, Bangladesh.
Website : www.bb.org.bd, Printed by Tithy Printing & Packaging, 28/C-1, Toyenbee
Circular Road, Motijheel C/A, Dhaka-1000.

DCP : 10-2021-500