Prudential Regulation for Banks and

Negotiable Instrument Act, 1881

Dipti Rani Hazra

Deputy Director
Basel II Implementation Cell
Banking Regulation & Policy Department
Bangladesh Bank, HO. Dhaka.

1
POLICY ON CAPITAL ADEQUACY OF BANKS
Capital base
Regulatory capital will be categorized into three tiers: Tier 1,
Tier 2, and Tier 3.

Tier 1 capital called ‘Core Capital’ contains of highest

quality of capital elements that consists of :
a) Paid up capital
b) Non-repayable share premium account
c) Statutory reserve
d) General reserve
e) Retained earnings
f) Minority interest in subsidiaries
g) Non-cumulative irredeemable preference shares
h) Dividend equalization account
Tier 2 capital
Tier 2 capital called ‘Supplementary Capital’ represents other
elements which fall short of some of the characteristics of the
core capital but contribute to the overall strength of a
bank and consists of:

a) General provision
b) Revaluation reserves
• Revaluation reserve for fixed assets
• Revaluation reserve for securities
• Revaluation reserve for equity instrument
c) All other preference shares
d) Subordinated debt
Tier 3 capital
Tier 3 capital called ‘Additional Supplementary
Capital’, consists of short-term subordinated debt
(original maturity less than or equal to five years
but greater than or equal to two years) would be
solely for the purpose of meeting a proportion of the
capital requirements for market risk.
Capital for foreign banks
For foreign banks operating in Bangladesh, Tier 1
capital consists of the following items:

a) Funds from head office

b) Remittable profit retained as capital
c) Any other items approved by BB for inclusion in Tier 1 capital

Tier 2 capital consists of the following items:

a) General provision
b) Borrowing from head office in foreign currency in compliance
with the regulatory requirement as specified in Annex A.
c) Revaluation reserve for securities
d) Any other items approved by BB for inclusion in Tier 2 capital
Minimum capital requirements
No Scheduled Bank in Bangladesh shall commence and
carry on its business unless it has the minimum required capital
fixed by BB from time to time as per section 13 of Bank Company
Act, 1991.

Minimum capital requirements as required under Article 13 of

Banking Companies Act, 1991 for all banks has been raised to
Tk.400 crore of which the paid shall be minimum Tk.200
crore

Banks have to maintain minimum CAR on ‘Solo’ basis as well

as on ‘Consolidated’ basis as per instruction(s) given by BB
from time to time.

Banks have to maintain at least 50% of required capital as

Tier 1 capital
From January 2010, banks will maintain CAR
as per following schedule:
From January,2010 to From July,2010 From July, 2011 to
June 30 , 2010 onwards
to June 30, 2011
Capital
Adequacy ≥ 8%CAR ≥ 9%CAR ≥ 10%CAR
Ratio (CAR).

CAR = Eligible Regulatory Capital

X 100
RWA

MCR 8% of RWA 9% of RWA 10% of RWA

7
 Minimum Capital Requirements (MCR)

a) Banks in Bangladesh have to maintain a

minimum Paid up Capital/Capital deposited
with BB (applicable for foreign bank branches)
as fixed by BB from time to time.

And as well as

b) also have to maintain a minimum Capital

Adequacy Ratio (CAR) of at least 9% of Risk
Weighted Assets (RWA) with core capital (Tier-
1) not less than 4.5% of RWA.

CAR (%) = Eligible Regulatory Capital ×100

RWA

8
 MCR…

c) Total Risk weighted Assets (RWA): Total

Risk Weighted Assets (RWA) will be determined
by multiplying capital charge for market risk and
operational risk by a factor of 11.11 (i.e., the
reciprocal of the minimum capital adequacy ratio
of 9%), and adding the resulting figures to the
sum of risk weighted assets for credit risk
Total RWA =
RWA for Credit Risk + 11.11 × (Capital Charge for Market
Risk + Capital
Charge for Operational Risk)

MCR = 9% of Total RWA

9
 Approaches for calculating Risk Weighted
Assets

In Bangladesh, Basel II implementation will

follow the specific approaches:
a) Standardized Approach for calculating Risk
Weighted Assets (RWA) against Credit Risk
b) Standardized measurement
method for calculating capital charge
against Market Risk; and
c) Basic Indicator Approach for calculating capital
charge against Operational Risk .

10
 RWA for Credit Risk…
According to the standardized approach,
the risk weight will be based on the credit
rating made by External Credit
Assessment Institutions (ECAIs).

Banks are required to assign a risk weight to

all their on-balance sheet and off-balance
sheet exposures.

11
 Credit Risk - Definition

Credit Risk:
Credit risk is the potential that a bank borrower or
counterparty fails to meet its obligation in
accordance with agreed term.

12
 Capital Charge against Market Risk
This section is concerned with the calculation of
capital charges for market risk on Trading Book
exposures.

Allocation of capital is required in respect of the

exposure to risks deriving from changes in
Interest rates and equity prices, in the banks’
trading book, in respect of exposure to risks
deriving from changes in foreign exchange
rates and commodity price in the overall
banking activity.

13
 Capital Charge against Operational Risk

Operational Risk is defined as the risk

of loss resulting from inadequate or
failed internal processes, people and
systems or from external events.

14
POLICY ON LOAN CLASSIFICATION AND
PROVISIONING

Basis for Loan Classification: -

(A)Objective Criteria:

1) Any Continuous Loan if not repaid/renewed within

the fixed expiry date for repayment will be treated
as past due/overdue from the following day of the expiry
date.
This loan will be classified as:
 Sub-standard if it remains past due/overdue for 6 months
or beyond but less than 9 months,
 `Doubtful' if for 9 months or beyond but less than 12
months and
 `Bad-Debt' if for 12months or beyond
POLICY ON LOAN CLASSIFICATION AND
PROVISIONING
2) Any Demand Loan if not repaid/rescheduled within the
fixed expiry date for repayment will be treated as past
due/overdue from the following day of the expiry date.

This loan will be classified as:

 Sub-standard if it remains past due/overdue for 6 months
or beyond but less than 9 months,
 `Doubtful' if for 9 months or beyond but less than 12
months and
 `Bad-Debt' if for 12months or beyond
POLICY ON LOAN CLASSIFICATION AND
PROVISIONING

(3.1) In case of Fixed Term Loans, which are

repayable within maximum five years of time: -If
the amount of `defaulted installment' is equal to
or more than the amount of installment(s) due
within 6 months, the entire loan will be
classified as ``Sub-standard''.
POLICY ON LOAN CLASSIFICATION AND
PROVISIONING

If the amount of 'defaulted installment' is equal

to or more than the amount of installment(s)
due within 12 months, the entire loan will be
classified as ''Doubtful.

If the amount of 'defaulted installment' is equal to

or more than the amount of installment(s) due
within 18 months, the entire loan will be classified
as ''Bad -Loss.''
POLICY ON LOAN CLASSIFICATION AND
PROVISIONING

(3.2) In case of Fixed Term Loans, which are

repayable in more than five years of time: -

(a) If the amount of `defaulted installment' is

equal to or more than the amount of
installment(s) due within 12 months, the
entire loan will be classified as 'Sub-
standard.'
POLICY ON LOAN CLASSIFICATION AND
PROVISIONING

(b) If the amount of `defaulted installment

' is equal to or more than the amount of
installment(s) due within 18 months, the
entire loan will be classified as 'Doubtful'.

(c) If the amount of 'defaulted installment

'is equal to or more than the amount of
installment(s) due within 24 months, the
entire loan will be classified as 'Bad-Debt'.
POLICY ON LOAN CLASSIFICATION AND
PROVISIONING
(4) The Short-term Agricultural and Micro - Credit
will be considered irregular if not repaid within the
due date as stipulated in the loan agreement.

If the said irregular status continues, the credit

will be classified as:
 'Substandard ' after a period of 12 months,
 'Doubtful' after a period of 36 months and
 'BadDebt' after a period of 60 months from the
stipulated due date as per loan agreement
Special Mention Account (SMA)
All unclassified loans other than Special
Mention Account (SMA) will be treated as
Standard.
A Continuous credit, Demand loan or a Term
Loan which will remain overdue for a period of
90 days or more, will be put into the "Special
Mention Account (SMA)''.
Special Mention Account (SMA)

This will help banks to look at accounts with

potential problems in a focused manner and it
will capture early warning signals for accounts
showing first sign of weakness. Loans in the
"Special Mention Account (SMA)" will
have to be reported to the Credit
Information Bureau (CIB) of Bangladesh
Bank.
B. Qualitative Judgment:
If any uncertainty or doubt arises in respect of
recovery of any Continuous Loan, Demand
Loan or Fixed Term Loan, the same will have to
be classified on the basis of qualitative
judgment be it classifiable or not on the basis
of objective criteria.
B. Qualitative Judgment:

If any situational changes occur in the

stipulations in terms of which the loan was
extended or if the capital of the borrower is
impaired due to adverse conditions or if the
value of the Securities decreases or if the
recovery of the loan becomes uncertain due to
any other unfavorable situation, the loan will
have to be classified on the basis of qualitative
Judgment.
Maintenance of provision:

(a)Banks will be required to maintain

General Provision in the following
way :
@ 1% against all unclassified loans (other
than loans under Consumer Financing and
Special Mention Account.)*
Maintenance of provision:
@ 5% on the unclassified amount for Consumer
Financing whereas it has to be maintained @
2% on the unclassified amount for
(i) Housing Finance and
(ii) Loans for Professionals to set up business
under Consumer Financing Scheme.

(3) @ 5% on the outstanding amount of

loans kept in the 'Special Mention Account'
after netting off the amount of Interest
Suspense.
Maintenance of provision:

(b) Banks will maintain provision at the

following rates in respect of classified
Continuous, Demand and Fixed Term
Loans:
(1) Sub-standard 20%
(2) Doubtful 50%
(3) Bad/Loss 100%
Maintenance of provision:
Provision in respect of Short-term Agricultural and
Micro-Credits is to be maintained at the following rates:

(1) All credits except 'Bad/Loss'(i.e. 'Doubtful', 'Sub-

standard', irregular and regular credit accounts) : 5%

(2) 'Bad/Loss' : 100%

(c) Banks are required to maintain general provision

against Off-balance sheet exposures in the following
manner:
@ 1% provision effective from December 31, 2008 .
CORPORATE GOVERNANCE IN BANK
MANAGEMENT
Board of directors and management of a bank
should comprise of the competent and professionally
skilled persons with a view to ensuring good and
corporate governance in the bank management.

It is also inevitable to have specific demarcation of

responsibilities and authorities between these
controlling bodies over bank's affairs.
CORPORATE GOVERNANCE IN BANK
MANAGEMENT
In absence of specific division of responsibilities
and authorities,

even in spite of these bodies‘ being formed with

skilled and efficient persons,

the desired goals of an institution cannot be

achieved

due to lack of transparency and accountability

of all concerned.
CORPORATE GOVERNANCE

Responsibilities and authorities of the board

of directors:
(a)Work-planning and strategic management:
(b)Lending and risk management:
(c)Internal control management:
(d)Human resources management and
development:
(e)Financial management:
(f)Formation of supporting committees:
(g)Appointment of CEO:
RESTRICTION ON LENDING TO DIRECTORS OF PRIVATE
BANKS

Any loan facility or guarantee or security provided

to a Director of a bank or to his relatives must be
sanctioned by the Board of Directors of the bank
and has to be specifically mentioned in the Balance
sheet of the bank.

the total amount of the loan facilities extendable to

a Director or to his relatives should not exceed
50% of the paid-up value of the shares of that
bank held in Director's own name.
RESTRICTION ON LENDING TO DIRECTORS OF PRIVATE
BANKS

Loan facilities in excess of Tk.10 lacs for funded

loan and Tk.50 lacs (funded and non-funded) in
favor of any Director or his relatives or
proprietorship or partnership firms and private
or public limited companies wherein those persons
have interests, can be extended subject to
obtaining no-objection from Bangladesh Bank.
POLICY ON SINGLE BORROWER EXPOSURE
As a result of increase in capital of almost all the banks, now
it has been decided to reduce the single borrower exposure
limit from 50% to 35%. Thus-

(a)The total outstanding financing facilities by a bank to any

single person or enterprise or organization of a group shall
not at any point of time exceed:

35% of the bank's total capital subject to the condition

that the maximum outstanding against fund based
financing facilities (funded facilities) do not exceed 15% of
the total capital.

In this case total capital shall mean the capital held by

banks as per sectioin-13 of the Bank Company Act, 1991.
POLICY ON SINGLE BORROWER EXPOSURE

(b) Non-funded credit facilities, e.g. letter

of credit, guarantee etc. be provided to a
single large borrower. But under no
circumstances, the total amount of the
funded and non-funded credit facilities
shall exceed 35% of a bank's total capital.
POLICY ON SINGLE BORROWER EXPOSURE

in case of export sector single borrower

exposure limit shall remain unchanged at 50%
of the bank's total capital. But funded facilities
in case of export credit shall also not exceed
15% of the total capital.
POLICY FOR RESCHEDULING OF LOANS
If a bank is satisfied after due diligence mentioned above
that the borrower will be able to repay, the loan may be
rescheduled.

Otherwise, bank shall take all legal steps to realize the loan, make
necessary provision and take measures to write-off. The
rescheduling shall be for a minimum reasonable period of time.

At the time of placing the rescheduling proposal before the

Board of Directors the Bank shall apprise the Board in details,
what would be implications of such loan rescheduling on the
income and other areas of the bank.
POLICY FOR RESCHEDULING OF LOANS
Rescheduling of Term Loans:
 for first rescheduling will be considered only after cash
payment of at least 15% of the overdue installments or
10% of the total outstanding amount of loan, whichever, is
less;
 for the second time will be considered after cash payment
of minimum 30% of the overdue installments or 20% of
the total outstanding amount of loan, whichever, is less;
 rescheduling for more than two times will be considered
after cash payment of minimum 50% of the overdue
installments or 30% of the total outstanding amount of
loan, whichever is less;
POLICY FOR RESCHEDULING OF LOANS
For rescheduling of Demand and Continuous
Loans the rates of down payment,
depending on the loan amount, shall be as
under:
Amount of overdue Loan Rates of Down payment

Up to Tk.1.00 (one) crore 15%

Tk. 1.00(one) crore to Tk. 5.00 10% (but not less than
(five) crore Tk.15.00 lac)

Tk. 5.00(five) crore and above 5% (but not less than

Tk.50.00 lac)
PAYMENT OF DIVIDEND BY BANK COMPANIES

(1) No dividend in cash or in bonus share

(keeping in consideration the order issued on
11.09.01 by the Securities and Exchange
Commission in respect of issuance of bonus
share) can be declared with short-fall in capital
of the bank

(1) Banks shall have to comply with the following

conditions in respect of maintenance of
provision

(a) Provision against adversely classified loans shall

have to be maintained at the rate(s) specified by
Bangladesh Bank
PAYMENT OF DIVIDEND BY BANK COMPANIES

(b) General provision @ 1% against unclassified

loans shall have to be maintained;

(c) Provision against 'Investment' and 'Other

Assets' shall have to be maintained at the
rate(s) specified by Bangladesh Bank.
PAYMENT OF DIVIDEND BY BANK COMPANIES
Prior to declaration of dividend, the concerned bank shall have to
obtain specifically a certificate from the external auditor to this
effect that provisions have been properly maintained having
followed/complied with the rules, regulations and norms issued by
Bangladesh Bank and there is no short-fall in respect of
maintenance of capital adequacy and provision.

In case of declaring dividend in cash at higher rate i.e., beyond

20% , a sum equal to the amount of dividend in excess of 20%
shall have to be kept deposited in the Dividend Equalization Account
which shall be treated as `Core Capital' of the bank .
Guidelines on Managing Core Risks in
Banking
Due to deregulation and globalization of banking
business, banks are now exposed to diversified and complex
risks.

As a result, effective management of such risks has been

core aspects of establishing good governance in banking
business in order to ensure sustainable performance.

In recognition of the importance of an effective risk

management system, Bangladesh Bank has issued
guidelines on 'Managing Core Risks in Banking' on 07
October
2003.
Guidelines on Managing Core Risks in
Banking
The five core risks are:

a) CreditRisks,
b)Asset and Liability/Balance Sheet Risks,
c) Foreign Exchange Risks
d)Internal Control and Compliance Risks and
e) Money Laundering Risks.
THE NEGOTIABLE INSTRUMENTS ACT,
1881
An Act to define and amend the law relating to
Promissory Notes, Bills of Exchange and
Cheques.
Promissory Note - A “promissory note” is
an instrument in writing (not being a bank-
note or  a currency-note) containing an
unconditional under­taking, signed by the
maker, to pay a certain sum of money only
to, or to the order of, a certain person, or to
the bearer of the instrument.
THE NEGOTIABLE INSTRUMENTS ACT,
1881
Bill of Exchange – As per statutory
definition,  “bill of exchange” is an instrument
in writing containing an unconditional order,
signed by the maker, directing a certain
person to pay a certain sum of money only
to, or to the order of, a certain person or to
the bearer of the instrument.
A cheque is a special type of Bill of Exchange.
It is drawn on banker and is required to be
made payable on demand.
NEGOTIABLE INSTRUMENTS
 Provisions in respect of Cheques - A “cheque” is a bill
of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand.
‘Cheque’ includes electronic image of a truncated cheque
and a cheque in electronic form.

Drawer, Drawee.
The maker of a bill of exchange or cheque is
called the drawer ";

the person thereby directed to pay is called the "

drawee"

Crossing of Cheque – The Act makes specific provisions for

crossing of cheques.
NEGOTIABLE INSTRUMENTS
CHEQUE CROSSED SPECIALLY
- Where a cheque bears across its face an addition
of the name of a banker,  either with or without
the words “not negotiable”, that addition shall be
deemed a crossing, and the cheque shall be
deemed to be crossed specially, and to be
crossed to that banker.
 NEGOTIABLE INSTRUMENTS
PAYMENT OF CHEQUE CROSSED GENERALLY OR SPECIALLY

- Where a cheque is crossed generally, the banker

on whom it is drawn shall not pay it otherwise
than to a banker.  

- Where a cheque is crossed specially, the banker on

whom it is drawn shall not pay it otherwise than to
the banker to whom it is crossed, or his agent for
collection.
NEGOTIABLE INSTRUMENTS
CHEQUE BEARING “NOT NEGOTIABLE”

- A person taking a cheque crossed generally or

specially, bearing in  either case the words “not
negotiable”, shall not have, and shall not be
capable of giving, a better title to the cheque
than that which the person form whom he took it
had.

- Thus, mere writing words ‘Not negotiable’ does

not mean that the cheque is not transferable. It
is still transferable, but the transferee cannot get
title better than what transferor had.
NEGOTIABLE INSTRUMENTS
Penalty in case of dishonor of cheques
for insufficiency of funds

- If a cheque is dishonored even when

presented before expiry of 6 months, the
payee or holder in due course is required
to give notice to drawer of cheque within
30 days from receiving information from
bank.
The drawer should make payment within
15 days of receipt of notice.
NEGOTIABLE INSTRUMENTS
Ifhe does not pay within 15 days, the payee
has to lodge a complaint with Metropolitan
Magistrate or Judicial Magistrate of First Class,
against drawer within one month from the last
day on which drawer should have paid the
amount.
The penalty can be up to two years
imprisonment or fine up to twice the amount of
cheque or both. The offense can be tried
summarily. Notice can be sent to drawer by
speed post or courier.  Offense is
compoundable.
NEGOTIABLE INSTRUMENTS
Return of cheque should be for
insufficiency of funds
- The offence takes place only when cheque is
dishonored for insufficiency of funds or where
the amount exceeds the arrangement.

- Section 146 of NI Act only provides that once

complainant produces bank’s slip or memo
having official mark that the cheque is
dishonored, the Court will presume dishonor
of the cheque, unless and until such fact is
disproved.
NEGOTIABLE INSTRUMENTS
Presentment of Negotiable Instrument

- The Negotiable Instrument is required to be

presented for payment to the person who is liable to
pay. Further, in case of Bill of Exchange payable ‘after
sight’, it has to be presented for acceptance by
drawee.

- ‘Acceptance’ means that drawee agrees to pay the

amount as shown in the Bill. This is required as the
maker of bill (drawer) is asking drawee to pay certain
amount to payee. The drawee may refuse the
payment as he has not signed the Bill and has not
accepted the liability.
NEGOTIABLE INSTRUMENTS
Negotiation of Instrument
- The most salient feature of the instrument is that
it is negotiable. Negotiation does not mean  a
mere transfer. After negotiation, the holder in
due course can get a better title even if title of
transferor was defective.

- If the instrument is ‘to order’, it can be

negotiated by making endorsement. If the
instrument is ‘to bearer’, it can be negotiated by
delivery. As per definition of ‘delivery’, such
delivery is valid only if made by party making,
accepting or indorsing the instrument or by a
person authorized by him.
NEGOTIABLE INSTRUMENTS
Calculation of date of maturity of Bill
of Exchange - If the instrument is not
payable on demand, calculation of date of
maturity is important. An instrument not
payable on demand is entitled to get 3
days grace period.