BB signs mandatory for NBFIs to lend to subsidiaries

Non-bank financial institutions (NBFIs) will need to obtain permission from the central bank to lend to their subsidiaries or associates and waive loans or interest.

The move is aimed at protecting depositors’ interests and restoring discipline in the financial sector, the Bangladesh Bank said in a notice yesterday.

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The central bank proposed the directive after finding that NBFIs were investing in their subsidiaries or associated companies by exceeding the regulatory limit.

Also, the rules are violated in case of interest waiver or loan cancellation.

“As a result, discipline in the financial sector is hampered and there are fears that NBFIs will not recover their loans or investments,” the BB said.

In these circumstances, NBFIs will need to obtain prior central bank approval to lend to their subsidiaries or associates and waive the loans or interest.

It came after the BB discovered earlier that at least seven NBFIs were struggling to recover 2,050 crore of Tk they lent to their subsidiaries and associates in violation of the rules.

Under the Financial Institutions Act 1993, NBFIs are permitted to pay up to 30% of their capital to any person or company, which may also be their subsidiaries and associates. But the seven lent the amounts in violation of the exposure limit to a single borrower.

Today, 35 NBFIs operate in Bangladesh. Among them, two are wholly state-owned, one is a subsidiary of a state-run commercial bank, 19 were started by private national initiatives, and 13 were established by joint venture initiatives.

The main sources of funds for them are term deposits (at least three months duration), credit facilities from banks and other NBFIs, overnight money as well as bonds and securitization.

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