Assignment On NBFI Sector in Bangladesh
Assignment On NBFI Sector in Bangladesh
Assignment On NBFI Sector in Bangladesh
On
NBFI sector in Bangladesh
Prepared For
Palash Saha
Course Instructor
Financial Institutions and Markets, Fin-402
Prepared By
Asrafuzzaman
ID 1907
BBA 25th Batch
Date of Submission
11th July, 2018
A non-bank financial institution (NBFI) is a financial institution that does not have a
full banking license or is not supervised by a national or international banking regulatory agency. NBFIs
facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market
brokering. Examples of these include insurance firms, pawn shops, cashier's check issuers, check
cashing locations, payday lending, currency exchanges, and micro loan organizations. Alan
Greenspan has identified the role of NBFIs in strengthening an economy, as they provide "multiple
alternatives to transform an economy's savings into capital investment [which] act as backup facilities
should the primary form of intermediation fail."
NBFI in Bangladesh
NBFI or Non-Bank Financial Institution is also known as NBFC (Non-Bank Finance Companies). In
Bangladesh NBFI sector is monitored and controlled by Bangladesh Bank under the guideline of
Financial Institution Act, 1993. According to Financial Institution Act 1993, NBFIs are defined as,
“financial institution means such non-banking financial institutions, which- make loans and advances for
industries, commerce, agriculture or building construction; or carry out the business of underwriting,
receiving, investing and reinvesting shares, stocks, bonds, debentures issued by the Government or any
statutory organization or stocks or securities or other marketable securities; or carry out installment
transactions including the lease of machinery and equipment; or finance venture capital; and shall include
merchant banks, investment companies, mutual associations, mutual companies, leasing companies or
building societies”. At present, there are in total 32 NBFIs with 198 branches are operating within the
financial sector of Bangladesh among which three NBFIs are state owned, nineteen privately owned and
ten joint venture NBFIs.
LankaBangla Finance Ltd. Industrial Promotion and Development Company of Bangladesh Limited
(IPDC), IDLC Finance Limited, Uttara Finance and Investments Limited are the some familiar NBFI
institutiond in Bangladesh
A NBFC (Non-Banking Financial Company) is an organization that does not accept customer cash
deposits but provides all financial services except bank accounts.
(a) A bank interacts directly with customers ; while an NBFI interacts with banks and governments
(b) A bank indulges in a number of activities relating to finance with a range of customers; while an NBFI
is mainly concerned with the term loan needs of large enterprises
(c) A bank deals with both internal and international customers; while an NBFI is mainly concerned with
the finances of foreign companies
(d) A bank's man interest is to help in business transactions and savings/ investment activities; while
an NBFI's main interest is in the stabilization of the currency.
Functions of NBFI
1. Financial Intermediation:
The most important function of the non-bank financial intermediaries is the transfer of funds from the
savers to the investors.
Financial intermediation is economical and less expensive to both small businesses and small savers,
(a) It provides funds to small businesses for which it is difficult to sell stocks and bonds because of high
transaction costs,
(b) It also benefits the small savers by pooling their funds and diversifying their investments.
2. Economic Basis of Financial Intermediation:
Handling of funds by financial intermediaries is more economical and more efficient than that by the
individual wealth owners because of the fact that financial intermediation is based on
(a) The law of large numbers, and
(b) Economies of scale in portfolio management.
(i) Law of Large Numbers:
Financial intermediaries operate on the basis of the statistical law of large numbers. According to this law
not all the creditors will withdraw their funds from these institutions. Moreover, if some creditors are
withdrawing cash, some others may be depositing cash. Again, the financial intermediaries also receive
regular interest payments on loans or investments made by them. All these factors enable the financial
intermediaries to keep in cash only a small fraction of the funds provided by the creditors and lend or
invest the rest.
(ii) Economies of Scale:
Large size of the asset portfolios enables the financial intermediaries to reap various economies of scale in
portfolio management. The main economies are:
(a) Reduction of risk through portfolio diversification:
(b) Employment of efficient and professional managers; and
(c) Low administrative cost of large loans and
(d) Low costs of establishment, information and transactions.
3. Inducement to Save:
Non-bank financial intermediaries play an important role in promoting savings in the country. Savers
need stores of value to hold their savings in. These institutions provide a wide range of financial assets as
store of value and make available expert financial services to the savers. As stores of value, the financial
assets have certain special advantages over the tangible assets (such as, physical capital, inventories of
goods, etc.). They are easily storable, more liquid, more easily divisible, and less risky. In fact, saving-
income ratio is positively related to both financial institutions and financial assets; financial progress.
Induces larger savings out of the same level of real income.
4. Mobilization of Saving:
Mobilization of savings takes place when the savers hold savings in the form of currency, bank deposits,
post office savings deposits, life insurance policies, bills, bond's equity shares, etc. NBFI provides highly
efficient mechanism for mobilizing savings. There are two types of NBFTs involved in the mobilization
of savings;
(a) Depository Intermediaries, such as savings and loan associations, credit unions, mutual saving banks
etc. These institutions mobilize small savings and provide high liquidity of funds.
(b) Contractual Intermediaries, such as life insurance companies, public provident funds, pension funds,
etc. These institutions enter into contract with savers and provide them various types of benefits over the
long periods.
5. Investment of Funds:
The main objective of NBFIs is to earn profits by investing the mobilized savings. For this purpose, these
institutions follow different investment policies. For example, savings and loan associations, mutual
saving banks invest in mortgages, while insurance companies invest in bonds and securities.
The role of NBFI in economy
Funds Mobilization
The NBFI’s helps in the mobilization of resources by converting sales into investments. Without
mobilization of resources, there will not be a balance between intra-regional income and asset
distribution. In the absence of NBFI’s in the finance markets; turning savings into investments will
remain a dream for any economy. The primary objective of these lending institutions is economic
development and not just mere profit maximization.
Long term credit
Traditional banks are not keen giving long-term credit to trade and commerce industry. This is because
they hold only short-term repayable deposits which cannot be used for long-time lending purposes which
are a mismatch of deposits maturity and long-term credit. This is where NBFI’s come into the picture.
Large projects and mega infrastructure projects depend to a great extent on the funds advanced by the
non-bank lending institutions which boost economic development. One unique feature of NBFI is
advancing funds to corporations through equity participation.
Creates employment
One of the primary objectives of every macroeconomic policy is to create more jobs in the country.
NBFI’s helps in achieving full employment in the economy by working with the government and
disbursing funds to private sectors. These private sectors create more employment opportunities with their
business activities.
Increase productive potential
Development funding institutions aim at increasing the capital formation of a country by increasing the
capital stock. These institutions are part of NBFI’s and aim at increasing long-term capital formation of
industrial and other sectors. The increase in the capital stock of a country results in employment, national
income and GDP growth.
Development of financial market
NBFI’s are an important part of financial markets of a country. These lending institutions underwrite
public issues of corporations and provide the funds needed by the start-up companies as capital. They are
the significant part of the financial market and are a source of liquidity. The financial markets depend on
NBFI’s to function effectively.
1. Capital Adequacy
Capital adequacy focuses on the total position of NBFIs' capital and protects the depositors from the
potential shocks of losses that an NBFI might incur. It helps absorb major financial risks related to credit,
market, interest rate, etc. NBFIs in Bangladesh have been instructed under the Basel Accord to maintain
Capital Adequacy Ratio (CAR) of not less than 10.0 percent with at least 5.0 percent in core capital. At
the end of June 2016, out of 33 NBFIs, (one NBFI is yet to come under this operation) 2 were evaluated
as "1 or Strong", 15 were "2 or Satisfactory", 14 were "3 or Fair" and 1 was "4 or Marginal" in the capital
adequacy component of the CAMELS rating.
2. Asset Quality
The ratio of gross nonperforming loan /lease to total loan/lease is used to judge the asset quality of
NBFIs. At the end of June 2016, the NPL ratio for NBFIs was 9.0 percent. In the total asset composition
of all NBFIs, the concentration of loans, lease and advances was 74.2 percent. At the end of June 2016,
out of 33 NBFIs, 1 was evaluated as "1 or Strong", 7 were "2 or Satisfactory", 14 were "3 or Fair", 9 were
"4 or Marginal" and 1 was "5 or Unsatisfactory" in the asset quality component of the CAMELS rating
matrix (the remaining one NBFI is yet to come into rating).
3. Management Efficiency
In financial institutions, management efficiency represents the ability of management for transforming
inputs (deposits, other funds and human resources) into outputs (investments/ leases and other income
generating assets). Total expenditure to total income, operating expenses to total expenses, earnings and
operating expenses per employee and interest rate spread are generally used to gauge management
efficiency. At the end of June 2016, out of 33 NBFIs, 4 were evaluated as "1 or Strong", 21 were "2 or
Satisfactory", 4 were "3 or Fair", 2 were "4 or Marginal" and 1 was "5 or unsatisfactory" in the
Management Capacity component of the CAMELS rating (the remaining one NBFI is yet to come into
rating)
4. Earnings and Profitability
Earnings and profitability of an NBFI reflects its efficiency in managing resources and its long term
sustainability. Among various measures of earnings and profitability, the best and widely used indicator is
the return on assets (ROA) which is supplemented by return on equity (ROE). ROA and ROE of all the
NBFIs in June 2016 were 0.8 and 5.6 percent respectively. At the end of June 2016, out of 33 NBFIs, 3
were evaluated as "1 or Strong", 16 were "2 or Satisfactory", 11 were "3 or Fair" and 2 were "4 or
Marginal" in the earnings and
5. Liquidity
NBFIs are allowed to mobilize term deposit only. At present, term liabilities are subject to a statutory
liquidity requirement (SLR) of 5.0 percent inclusive of average 2.5 percent (at least 2.0 percent in each
day) cash reserve ratio (CRR) on a bi-weekly basis. The SLR for the NBFIs operating without taking term
deposit is 2.5 percent. The Infrastructure Development Company Limited (IDCOL) established by the
Government of Bangladesh is exempted from maintaining the SLR. At the end of June 2016, out of 33
NBFIs, 19 were evaluated as "2 or Satisfactory", 10 were "3 or Fair", 2 were "4 or Marginal" and 1 was
"5 or Unsatisfactory" in the liquidity position component of the CAMELS rating (the remaining one
NBFI is yet to come into rating).
6. Sensitivity to Market Risk
The sensitivity to market risk reflects the degree to which changes in interest rates or equity prices can
adversely affect an NBFI's asset-liability position, earnings and capital. When evaluating this sensitivity
component, consideration should be given to management's ability to identify, measure, and control
market risk via the implementation of effective Core Risk Management System. Vulnerability of the
NBFI in a stressed situation from either an interest rate or equity price shock (or both) should be taken
under consideration to evaluate sensitivity. For many NBFIs, the primary source of market risk arises
from non-trading positions and their sensitivity to changes in interest rates. At the end of June 2016, out
of 33 NBFIs, 3 were evaluated as "1 or Strong", 9 were "2 or Satisfactory", 15 were "3 or Fair", 4 were "4
or Marginal" and 1 was "5 or Unsatisfactory" in the sensitivity to market risk component of the CAMELS
rating matrix (the remaining one NBFI is yet to come into rating).