DFIM Circular No. 05: Strengthening of Internal Control and Compliance (ICC), Pre-inspection of Loan files and establishment of Dashboard in NBFIs

Department of Financial Institutions and Markets Bangladesh Bank Head Office Dhaka. Ref No: DFIM-Circular-05

To: Managing Director / Chief Executive Officer All Financial Institutions operating in Bangladesh.

Dear Sir,

Regarding the strengthening of Internal Control and Compliance (ICC) management and establishment of a Dashboard in the context of preventing irregularities in loans/leases/investments of Financial Institutions.

It is brought to your kind attention that Direction No. 1(c) of DFIM Circular No. 07, dated: 25 September 2007, contains directions for the formation of a regular Audit Committee (or by whatever name it may be called) in all types of loan/lease/investment management of Financial Institutions to maintain qualitative standards. Additionally, through DFIM Circular No. 13, dated: 26 October 2011, directions have been provided regarding the responsibilities and duties of the Inspection Committee, organizational structure, eligibility for membership, etc., to ensure Non-Banking Financial Institutions (NBFIs).

2. However, recent investigations into the abnormal increase in the non-performing loan ratio of several Financial Institutions, reduction in cash flow due to non-recovery of distributed loans, etc., have revealed that Financial Institutions are not complying with the Rules of the Financial Institutions Act, 1993 and directions issued from time to time by the Department of Financial Institutions and Markets of Bangladesh Bank. This has created situations resulting from issuing loans without collateral/adequate supporting collateral, providing loan facilities exceeding the limit fixed for a single customer, failing to conduct proper documentation prior to loan disbursement, and failing to ensure the proper use of distributed loans. This indicates a deficiency in the Internal Control and Compliance (ICC) management system, which is by no means desirable.

3. In order to overcome this situation, it has been decided to strengthen and empower the Internal Control and Compliance management system of Financial Institutions to strengthen the supervision of loans/leases/investments and ensure loan discipline, as follows:

(1) In the case of any loan/lease/investment of 10 million Taka and above, Financial Institutions must conduct a pre-inspection program through their respective Non-Banking Financial Institutions (NBFIs) to ensure compliance with rules and regulations, proper execution of documentation prior to loan disbursement, and compliance with all activities related to the loan agreement. The report must be preserved in the relevant file.

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(2) In the case of any loan/lease/investment, Financial Institutions must establish a Dashboard to closely supervise matters such as receiving adequate supporting collateral according to the Rules of the Financial Institutions Act, 1993, following asset classification, ensuring loan quality and proper use, and compliance with loan agreements. The Chief Executive and the Head of the Internal Control and Compliance department of the Financial Institution will regularly monitor the aforementioned Dashboard.

(3) If collateral is not received according to the Rules of the Financial Institutions Act, 1993, the maximum loan limit allowed for a single customer has been exceeded, the circular regarding the proper use of loans is not complied with, and the policy regarding loan agreement compliance is not followed, the information regarding such loans must be compulsorily sent to the Department of Financial Institutions and Markets of Bangladesh Bank in the form of a report signed by the Head of Internal Control and Compliance. This report must be sent within the middle of the first week of the month following the end of each month.

(4) If any serious regulatory violation is discovered during the pre-inspection that is contrary to loan discipline and may pose a risk to future loan recovery, such a report must be immediately reported directly to Bangladesh Bank without waiting for the deadline for submitting the report mentioned in this direction.

(5) A copy of the report sent to Bangladesh Bank must be sent directly to the Chairman of the Audit Committee by the Head of ICC, and a summary of the obtained deficiencies/deviations must be presented at the next Board meeting of the institution.

These directions are issued under the powers conferred by Section 18(6) of the Financial Institutions Act, 1993, and will take effect immediately.

Yours faithfully,

(Md. Amir Uddin) Director (DFIM) Phone: 9530178. -02-