BB initiates CoFI to ensure market discipline

Bangladesh Bank (BB) has introduced the cost of funds index (CoFI) for non-banking financial institutions (NBFIs) aiming to ensure market discipline.

“The CoFI will strengthen the liquidity management of NBFIs which will also help them build future capability,” said the central bank Governor Dr Atiur Rahman, while inaugurating the CoFI on the central bank’s website at its auditorium in the city Wednesday.

He said all the banks will come under the process very soon as necessary preparations are going on.

The BB Governor said: “We have launched the CoFI as the first country in the sub-continent and it is part of our ongoing automation and digitalisation process.”

bbHighlighting the economic development of the country, he said according to a London-based research, Bangladesh has progressed in the seven out of the eight indicators of development, reports the Financial Express.

BB Deputy Governor SK Sur Chowdhury said the CoFI would ease the total activities of NBFIs including risk management.

“We have started the process for the NBFIs, and all banks will come under the process in a short time,” he said.

Expressing concern over the classified loans in the NBFIs, Mr Chowdhury said up to September last, the average bad loans were 7 per cent, and some NBFIs had more than 10 per cent classified loans.

BB Deputy Governor Nazneen Sultana said the central bank has almost come under the automation and the total economy of the country will be benefited from the process.

Bangladesh Bank data shows that the cost of funds (CoFs) and the adjusted cost of funds (ACoFs) were almost stable in the months from December, 2012, to October, 2013. The CoFs ranged from 12.82 per cent to 12.07 per cent and ACoFs were between 14.59 per cent and 13.78 per cent in the same period.

There are two computations of cost of funds: one is for all the interest-bearing funds and the other is for the interest-bearing funds excluding the low-cost specific purpose-scheme funds, generally known as adjusted cost of funds.

The CoFI serves as the reference rate for pricing the variable interest loan products. In setting the variable interest rate of a new loan, the NBFIs will add margin to the industry CoFI or adjusted CoFI.

Through this process, by consolidating the monthly data of the NBFIs, BB will prepare and publish a monthly weighted average CoFI on its website. The CoFI will be for a given month on or before the last business day of the following month.

BB Deputy Director Md Iqbal Hossain said that the CoFI reflects the interest expenses reported for a given month by the reporting FIs.

For example, the CoFI for June, which reflects the interest expenses incurred by the FIs during June, will usually be announced on or before the last business day of July.

“CoFI will serve as the reference rate for pricing variable interest loan products,” he said.

In this process, Mr Hossain said, the NBFIs have to compute their base rate and submit statements to the Department of Financial Institutions and Markets (DFIM) of BB.

If any FI does not transmit the necessary data according to the timetable, BB will make a ‘good faith effort’ to publish the CoFI as scheduled, based on whatever data received from other NBFIs.

If BB publishes the CoFI based on data received from fewer than all the NBFIs, BB will disclose the number of NBFIs that supplied data and the total number of NBFIs.

“In cases, where it is deemed fit, BB will conduct inspection for having satisfaction with the report’s view. With the CoFI, more transparency and accountability will be ensured,” he added.