The government is mulling formation of a watchdog that would deal with the systematic problems of non-performing loans that have troubled some banks and financial institutions over the years, according to an official document.

To be named as Financial Stability Council (FSC) the forum will suggest steps to maintain financial stability, improve the resolution regime for financial institutions and design macro-prudential regulations and instruments.

The country’s banking system has long been afflicted with defaulting loans with bad borrowers harming the good and honest businesses. It has been a major concern in the financial sector, the issues even taken to the country’s apex court.

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

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

To facilitate the repayment of outstanding loan instalments, from January 2021, the borrowers have been given an opportunity to increase the term of the existing unclassified term loan account by a maximum of 50 per cent. 

As a result of these initiatives, classified loans have declined compared to that of the previous year, said the document.

Also read: Banks, financial institutions asked to initiate process to recover default loans

The formation of the FSC has long been demanded by the international development partners. 

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

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

Finance ministry, the central bank, the Bangladesh Securities and Exchange Commission, the Microcredit Regulatory Authority and the Insurance Development and Regulatory Authority as well as relevant government agencies such as the National Board of Revenue will be included in this FSC, according to the sources.

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

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

The government has opted for making some stress testing guidelines considering the systemic risks to ensure stability in the financial sector, said the document.

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

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

A software has been launched for the monitoring of large loans of banks, through which clear idea about bank-wise large loans of the entire banking sector will be available.

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It will be possible to take necessary actions accordingly. 

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

At institutional level, stress testing techniques provide a way to quantify the impact of changes in a number of risk factors on the assets and liabilities portfolio of the institution. 

For instance, a portfolio stress test makes a rough estimate of the value of portfolio using a set of exceptional but plausible events in abnormal markets.