DISCLOSURE UNDER BASEL II As On

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Ralph Neal
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1 DISCLOSURE UNDER BASEL II As On Bnks operting in Bngldesh re mintining cpitl since 1996 on the sis of risk weighted ssets in line with the Bsel Committee on Bnking Supervision (BCBS) cpitl frmework pulished in Considering present complexity nd diversity in the nking industry nd to mke the nks cpitl requirement more risk sensitive. Bngldesh Bnk, eing the centrl nk of the country hs decided to dopt the Risk Bsed Cpitl Adequcy for nks in line with cpitl dequcy frmework devised y the BCBS populrly known s ' Bsel II'. Bngldesh Bnk prepred guideline to e followed y ll scheduled nks from Jnury These guidelines re rticulted with the following res, viz; A) Introduction nd constituents of Cpitl, B) Credit Risk, C) Mrket Risk, D) Opertionl Risk, E) Supervisory Review Process, F) Supervisory Review Evlution Process, G) Mrket Discipline, H) Reporting Formts nd I) Annexure These guidelines will e le to mke the regultory requirements more pproprite nd will lso ssist the nks to follow the instructions more efficiently for smooth implementtion of the Bsel II frmework in the nking sector of Bngldesh. The mjor highlights of the Bngldesh Bnk regultions re: ) To mintin Cpitl Adequcy Rtio (CAR) t minimum of 10% of Risk weighted ssets ) To dopt the Stndrdized Approch for credit risk for implementing Bsel -II c) To dopt Stndrdized (Rule Bsed) Approch for mrket risk nd Bsic indictor Approch for opertionl risk nd to sumit the returns to Bngldesh Bnk on qurterly sis.

2 Disclosure frmework The generl qulittive disclosure requirements For ech seprte risk re (e.g. credit, mrket, opertionl, nking ook, interest rte risk, equity) nk must descrie their risk mngement ojectives nd policies, including: Strtegies nd processes, The structure nd orgniztion of the relevnt risk mngement function, The scope nd nture of risk reporting nd / or mesurement systems, Policies for hedging nd / or mitigting risk nd strtegies nd processes for monitoring the continuing effectiveness of hedges / mitigtes. The following components set out in tulr form re the disclosure requirements ) Scope of ppliction ) Cpitl structure c) Cpitl dequcy d) Credit risk e) Equities: disclosures for nking ook positions f) Interest rte risk in the nking ook (IRRBB) g) Mrket risk h) Opertionl risk Scope of ppliction Qulittive The nme of the top corporte entity in the group to which this guide lines pplies Bngldesh Krishi Bnk. An outline of differences on the sis of consolidtion for ccounting nd regultory purposes, with rief description of the entities within the group tht re fully consolidted. Bngldesh Krishi Bnk's MCR hs een rrived t on consolidtion Bsis- 1) tht re not given deduction tretment, BKB hs no susidiry compny. 2) tht re neither solo nor deducted (e.g. where the investment is risk weighted) c ) Any restrictions, or other mjor impediments, on trnsfer of fund or regultory cpitl within the group Quntittive Yes, there re d The ggregte mount of cpitl deficiencies in ll susidiries included in the consolidtion tht re not deducted nd the nme(s) of such susidiries. 2

3 Qulittive Cpitl Structure Summry informtion on the terms nd conditions of the min fetures of ll cpitl instruments, especilly in the cse of cpitl instruments eligile for inclusion in Tier 1 or in Tier 2. Tier -1 Cpitl comprises of pid up Cpitl, Sttutory Reserve, Generl Reserve nd Retined Ernings. Quntittive Tier-2 Cpitl consists of Generl Provision, Asset Revlution Reserve Revlution Reserve for Securities, nd Revlution Reserve for Equity Instrument nd Blnce of Exchnge Equliztion ccount. The mount of Tier-1 cpitl, with seprte disclosure of : (mount figure in crore Tk) )Pid up cpitl Re-Cpitliztion Sttutory reserve Generl reserve Retined ernings ( ) Minority interest in susidiries Other ( if ny item pproved y BB) ) The totl mount of Tier -2 cpitl d) Deductions from Tier -1 cpitl e) Deductions from Tier -1I cpitl e) Totl eligile cpitl ( ) Cpitl Adequcy Qulittive Quntittive A summry discussion of the nk's pproch to ssessing the dequcy of its cpitl to support current nd future ctivities. Since its inception in 2009 the nk hs een following Stndrdized Approch, Stndrdized (Rule Bsed) Approch nd Bsic indictor Approch for clculting cpitl requirement ginst Credit Risk, Mrket Risk nd Opertionl Risk respectively. () Cpitl requirement for Credit Risk Tk crore. (c) Cpitl requirement for Mrket Risk Tk.2.86 crore (d) Cpitl requirement for Opertionl Risk Tk crore. (e) Cpitl Adequcy Rtio % (f) Tier-1 Cpitl to RWA % 3

4 Credit Risk Credit risk is defined s the possiility of filure of counterprty to meet its oligtion s per greed terms. Bnks re very much prone to credit risk due to its core ctivities i.e. lending to corporte, SME, individul. The min ojects of credit risk mngement is to minimize the negtive impct through dopting proper mitigtes nd lso limiting credit risk exposure within cceptle limit. Bngldesh krishi Bnk follows Bngldesh Bnk s BRPD circulr no-14 Dted for clssifiction of lons nd dvnces. Clssificti Types of Lons Clssifiction Period of on SL 1 Continuous Lon Csh credit (Hypo & Pledge) 2 Demnd Lon -LIM -FBP -IBP 3 Fixed Term Lon which re repyle under specific repyment schedule 4 Fixed Term Lon which lon mount elow 10 lc Sttus SMA SS DF BL SMA SS DF BL SMA SS DF BL SMA SS DF BL 5 Short term Agriculture & Micro credit SMA SS DF BL Provisioning depending on the group:- Prticulrs Short Term Agriculture & Micro Credit Consumer Finncing Clssifiction 2 Months 3 Months 6 Months 9 Months 2 Months 3 Months 6 Months 9 Months 2 Months 3 Months 6 Months 9 Months 2 Months 3 Months 6 Months 9 Months Months 36 Months 60 Months All other Credit Other thn HF,LP HF LP UC Stndrd 5% 5% 2% 2% 1% SMA - 5% 2% 2% 1% Clssified SS 5% 20% 20% 20% 20% DF 5% 50% 50% 50% 50% BL 100% 100% 100% 100% 100% 4

5 Qulittive The Generl qulittive disclosure requirements with respect to credit risk, including: -As regrds cpitl chrge for Credit Risk, ll ssets in Bnking Book hve een risk weighted strictly sed on pre specified risk weight s determined y Bngldesh Bnk s per RBCA guideline. However, the Bnk hs conducted proper mpping with the grding of Bngldesh for those exposures or clims grded y ECAI. Definition of pst due nd impired (for Accounting purposes) Any clim or exposure tht hs een overdue for 90 dys or more is clled pst nd impired lon in ccordnce with the definition given y Bngldesh Bnk s per section 5(CC) of the Bnk Compnies Act Description of pproches followed for specific nd generl llownces nd sttisticl methods. -The Bnk hs een following stndrdized pproch for ssessing the requirement of cpitl chrge ginst Credit Risk. The methodology used for this pproch is to rte the exposures or y the ECAI (Externl Credit Assessment Institution) Discussion of the Bnk's credit risk mngement policy. -Bsed on CRMG guidelines pulished y Bngldesh Bnk, n updted nd well mnged Credit Risk Mngement Policy hs een plced in Bngldesh Krishi Bnk. -It serves s guide to effectively vert risks involved in lending of the nk. -The Credit Risk Grding (CRG) hs een in plce since its introduction in 2005 nd it is eing used for mking proper lending decision nd for dministering the CRM process. -Bngldesh Krishi Bnk credit policy is sed on the customers' need on their usiness nd security, erning cpcity of recipient. the repyment ility of the usiness, nd follows conservtive pproch in vlution of collterl. -The Credit policy of the nk is focused on the economic gol of the country nd policies dopted y the Government. It strives towrds the mteriliztion of the Government policies leding overll economic development of the country. -The policy stresses the need to give specil ttention to prolem lons nd to initite pproprite ction for protecting the Bnks interest on timely sis. -Bngldesh Krishi Bnk strictly dheres to the regultory policies, rules etc s regrd to credit mngement nd is in complince with regultory requirements s stipulted y Bngldesh Bnk from time to time. -The ojective of credit risk mngement is to minimize the different dimension of risks ssocited with credit exposures nd to mintin credit risk profile of the nk within tolerle rnge. 5

6 Quntittive c Totl gross credit risk exposures roken down y mjor types of credit exposure. (mount figure in crore Tk) Funded Non funded Totl Blnce sheet Exposures- 1) Csh ) Clims on Bngldesh Govt & BB ) Clims on Bnks nd NBFIs ) Clims on Corporte ) Clims ctegorized s retil portfolio ) Consumer Finnce ) clims fully secured y residentil property ) clims fully secured y commercil rel estte ) SME ) Pst due Clims ) Cpitl Mrket exposure ) Un listed Security ) Investment in premises, Fixed ssets, plnt ) All other ssets Clims on Bngldesh Govt & BB ) Stff lon & other investment ) All other ssets Csh item in process of collection ) All other ssets Off Blnce sheet Exposure 1) Clims on Bngldesh Govt & BB ) Clims on pulic sector entities ) Clims on Corporte Geogrphicl distriution of exposures, roken down in significnt res y mjor types of credit exposure Blnce sheet exposures (mount figure in crore Tk) Dhk Division Mymensingh Division Chittgong Division

7 Khuln Division Brisl Division Sylhet Division d Totl Industry type distriution of exposures, roken down y mjor types of credit exposure : Industry -wise distriution of lons nd dvnces: (mount figure in crore Tk) Agriculture Crop Lon Fishery Lon Livestock Lon Textile ( Industry & Trde) Trnsport SME RMG Lether Consumer Credit Trde Finncing Others industries Construction,Helth & Storge Others e Totl Residul contrctul mturity rekdown of the whole portfolio roken down y mjor types of credit exposure. Funded Exposure. (mount figure in crore Tk) Repyle on Demnd Not more thn 3 month More thn 3 month ut not more thn 1 yer More thn 1 yer ut not more thn 5 yer

8 More thn 5 yer Totl f By mjor industry or counterprty type : Amount of impired lons nd if ville pst due lons, provided seprtely crore Specific provision crore Generl provisions Chnges for specific llownces nd chnge Off during the period : Not Applicle g Gross Non performing Assets (NPAs) Tk crore Non performing Assets (NPAs ) to Outstnding lons & dvnces : 0.24:1.00 Movement of Non Performing Assets (NPAs) (mount figure in crore Tk) Opening lnce Additions Reductions Closing lnce Movement of specific provisions for NPAs : (mount figure in crore Tk) Opening lnce Provisions mde during the period Write off & Interest Remission Write -ck of excess provision Closing lnce

9 Qulittive Equities : for Bnking Book positions The generl qulittive disclosure requirement with respect to equity risk including: Differentition etween holdings on which cpitl gins re expected nd those tken under other ojectives including for reltionship nd strtegic resons. -Bsiclly, there is no differentition for ll equity holdings re held for expected cpitl gin. However, there re holdings which re kept for reltionship nd strtegic reson prt from cpitl gins. Discussion of importnt policies covering the vlution nd ccounting of equity holdings in the nking ook. This includes the ccounting techniques nd vlution methodologies used including key ssumptions nd prctices ffecting vlution s well s significnt chnges in these prctices. -Equity holdings in the nking ook re recorded in the ooks of ccounts t cost price. In fct there is no vlution methodology used in the nk. Provisions re mde ginst equity holdings when there tkes plce ny decrese in the vlue of equity holdings. Quntittive --Vlue disclosed in the lnce sheet of investments. s well s the fir vlue of those investments. for quoted securities comprison to pulicly quoted shre vlues where the shre price is mterilly different from fir vlue. -- Cpitl requirements roken down y pproprite equity groupings, consistent with the nks methodology. s well s the ggregte mounts nd the type of equity investments suject to ny supervisory provisions regrding regultory cpitl requirements. Investment in shres t cost price: ) Quoted shres core ) Un-quoted shres core 9

10 Qulittive Interest rte risk in the nking ook (IRRBB) The generl qulittive disclosure requirement including the nture of IRRBB nd key ssumptions. including ssumptions regrding lon prepyments nd ehvior of non mturity deposits nd frequency of IRRBB mesurement. Interest rte risk descries how the nk would e negtively ffected with the chnge in the interest rtes on its On- lnce sheet nd the Off- lnce sheet exposures. The Bnk uses simple Sensitivity Anlysis s well s Durtion Gp Anlysis to determine its vulnerility ginst the dverse moment of mrket vriles. Bngldesh Krishi Bnk discusses the interest rte issue in its ALCO meeting on monthly sis. In ddition JBL ssesses the interest rte risk using simple durtion nlysis s per the formul given y Bngldesh Bnk in its guidelines on Stress Testing. For chnge in interest rtes, currently, Bngldesh Krishi Bnk is more risk sensile for its Assets comprle to its Liilities. The Bnk is on continuous process of re-structuring in its ssets nd liilities to mke lnce etween them nd to ring the sitution ck in its fvor for ny chnge in interest rte. Quntittive The increse (decline) in erning or economic vlue ( or relevnt mesure used y mngement) for upwrd nd downwrd rte shocks ccording to mngement method for mesuring IRRBB. roken down y currency (s relevnt) The nk hs een using '' Stress Testing'' sed on the guideline pulished y Bngldesh Bnk to determine the following: Impct on erning nd Impct on Cpitl requirements 10

11 Qulittive. Mrket Risk Views of BOD on investment ctivities. -The BOD of the Bnk views the ' Mrket Risk' s the risk to the nks ernings nd Cpitl due to chnge in the mrket level of interest rtes of securities, foreign exchnge nd equities s well s the voltilities of those chnges. Methods used to mesure Mrket Risk -The Bnk uses the stndrdized (Rule Bsed) pproch to clculted mrket risk for trding ook exposures. Mrket Risk Mngement system -ALCO is the key tool for mnging mrket risk. An ALCO is in plce in the nk to dminister the system. Policies nd process for mitigting mrket risk -The only mitigtion tool tht the Bnk uses is the '' Mrking to Mrket'' for mitigting mrket risk, Besides, set risk/ loss tolernce level is in plce to mitigte mrket risk. Quntittive The cpitl requirements for (mount figure in crore Tk) interest rte risk Tk Equity position risk Tk 0.37 Foreign exchnge risk Tk.2.49 Qulittive Quntittive Commodity risk - Tk 0.00 Opertionl Risk Opertionl Risk of Bnk hs een worked out under the Bsic Indictor Approch of RBCA guidelines. The cpitl requirements for (mount figure in crore Tk) Opertionl risk Tk

12 Liquidity Rtio Liquidity risk is the risk tht given security or sset cnnot e trded quickly enough in the mrket to prevent loss (or mke the required profit) or when nk is unle to fulfill its commitments in time when pyment flls due. Thus, liquidity risk cn e of two types: Qulittive. Views of BOD on system to reduce liquidity Risk. - BKB hs dopted the Bsel III frmework on liquidity stndrds s prescried y Bngldesh Bnk (BB) nd hs put in plce requisite systems nd processes to enle periodicl computtion nd reporting of the Liquidity Coverge Rtio (LCR) & Net Stle Funding Rtio (NSFR). The Tresury Deprtment computes the LCR & NSFR nd reports the sme to the Asset Liility Mngement Committee (ALCO) every month for review where ALCO is chired y the Mnging Director s well s to the Risk Mngement Committee (Mngement Level). The Risk Mngement Committee of the ord sits qurterly to discuss the overll risk scenrio of the nk. Methods used to mesure liquidity Risk. The following methods re used to mesure Liquidity risk - Liquidity Coverge Rtio - Net Stle Funding Rtio (NSFR) - Csh Reserve Rtio (CRR), - Sttutory Liquidity Rtio (SLR) - Medium Term Funding Rtio (MTFR) - Mximum Cumultive Outflow (MCO) - Lon Deposit Rtio Liquidity Risk Mngement system - The Centrl Accounts-1deptt of the Bnk mnges liquidity risk with oversight from Assets-Liility Mngement Committee (ALCO) comprising senior executives of the Bnk. ALCO meets once in month to review strtegies on Asset Liility Mngement. Policies nd process for mitigting liquidity risk - The Liquidity risk mngement of the Bnk is undertken y the Asset Liility Mngement group in the Tresury in ccordnce with the Bord pproved policies nd ALCO pproved funding plns. Quntittive Liquidity Coverge Rtio % Net Stle Funding Rtio(NSFR) % Stock of High qulity liquid ssets crore Totl net csh outflows over the next 30 clendr dys core Aville mount of Stle funding crore Required mount of Stle funding crore 12

13 Leverge Rtio In order to void uilding-up excessive on nd off-lnce sheet leverge in the nking system, simple, trnsprent, non-risk sed leverge rtio hs een introduced y Bngldesh Bnk. The leverge rtio is intended to chieve the following ojectives: )constrin the uild-up of leverge in the nking sector which cn dmge the roder finncil system nd the economy; nd ) reinforce the risk sed requirements with n esy to understnd nd non-risk sed mesure. Qulittive Views of BOD on system to reduce excessive leverge In line with the BASEL III guidelines, BKB Bord of Directors emphsis to improve Leverge Rtio y enhncing Tier 1 cpitl. Leverge rtio is clculted dividing the Tier 1 Cpitl y the totl Exposure. Tier 1 Cpitl is clculted s per BASEL III guidelines. In the cse of exposure mesure, BKB includes oth on lnce sheet exposure nd off lnce sheet exposure. Policies nd process for mnging excessive on nd off lnce sheet leverge- Leverge rtio is clculted dividing the Tier 1 Cpitl y the totl Exposure. Tier 1 Cpitl is clculted s per BASEL III guidelines. In the cse of exposure mesure, BKB includes oth on lnce sheet exposure nd off lnce sheet exposure Approch for clculting exposure- Leverge rtio of Bnk hs een worked out under the Bsic Indictor Approch of RBCA guidelines in Solo-Bsis. Quntittive Leverge Rtio (-)28.79% On lnce sheet exposure crore Off lnce sheet exposure Totl exposure crore crore Remunertion 13

14 Qulittive Quntittive c d e Informtion relting to the odies tht oversee remunertion nd mndte of the Mngement - BKB follows the ntionl py scle nd 2015 Informtion relting to the design nd structure of remunertion processes nd the key fetures nd ojectives of remunertion policy - N/A Description of the wys in which current nd future risks re tken into ccount in the remunertion processes. It should include the nture nd type of the key mesures used to tke ccount of these risks. - N/A A discussion of the nk's policy on deferrl nd vesting of vrile remunertion nd discussion of the nk's policy nd criteri for djusting deferred remunertion efore vesting nd fter vesting - The Bnk hs vrious schemes in regrds to deferred nd vested vrile remunertion which re s under: ) Deth cum Survivl Supernnution Fund provides supernnution nd other enefits to the employees of the Bnk on their deth, disility, retirement/or eing incpcitted t ny time or for ny other cuse tht my e deemed fit s per Govt. rule. ) Stff House Building Lon ( permnent employee ny rnk fter completion of 5 (five) yers of service, cn vil of House Building Lon t Bnk Rte s per policy nd pprovl from the pproprite Authority Description of the different forms of vrile remunertion (i.e. csh, shres, nd shre -linked instruments nd other forms) tht the nk utilizes nd the rtionle for using these different forms - N/A Numer of employees hving received vrile remunertion wrd during the finncil yer -Totl 10,697 numer of employees got vrile remunertions during the yer Numer nd totl mount of gurnteed onuses wrded during finncil yer. -2 (Two) numer of gurnteed onus (Festivl Bonus) nd Ex-grcis were wrded during the yer nd the mount of onus ws Tk crore Totl mount of outstnding deferred remunertion, split into csh, shre nd shre-linked instruments nd other forms. 14

15 - N/A c d Totl Amount of deferred remunertion pid out in the finncil yer. -N/A Brekdown of mount of remunertion wrds for the finncil yer to show: Fixed nd vrile Fixed remunertion is Tk crore nd vrile remunertion is Tk crore. Quntittive informtion out employees exposure to implicit (eg. fluctutions in the vlue of shres or performnce units) nd explicit djustments (eg clw cks or similr reversls or downwrd revlutions of wrds) of deferred remunertion nd retined remunertion: -N/A 15

Pillar 3 Quantitative Disclosure

Pillar 3 Quantitative Disclosure Pillr 3 Quntittive Disclosure In complince with the requirements under Bsel Pillr 3 nd the Monetry Authority of Singpore (MAS) Notice 637 Public Disclosure, vrious dditionl quntittive nd qulittive disclosures