Non-bank financial institutions (NBFIs) will no longer be allowed to take out loans against depositors' funds kept in the form of treasury bills, bonds and fixed deposits as statutory liquidity ratio (SLR).
Banks and NBFIs need to invest 3.5% of their term deposits in government securities to maintain SLR.
The Bangladesh Bank in a circular issued on Monday directed NBFIs to refrain from taking loans against provisioned money maintained as protection for term deposits.
Seeking anonymity, a central bank official said SLR is meant for giving protection to depositors. Such money should be invested in financial tools from where encashment is possible whenever it is necessary.
Financial institutions have to maintain SLR to pay off savers when they fall under financial stress.
But if there are any liabilities on such protection money, it cannot be chased out, which is not called SLR, he added.
As per rules, banks cannot take out loans against statutory reserves. But, NBFIs cashed in on no such rules in place for them, he also said.
There are 34 NBFIs in the country with Tk44,232 crore in term deposits as of 30 March 2021.
Earlier, the Bangladesh Bank warned the NBFIs of lending anomalies as a central bank inspection found NBFI loans ending up to others rather than to actual borrowers.
Terming such lending a violation of the "Integrated Risk Management Guidelines for Financial Institutions-2016", the central bank in a circular asked the NBFIs for stopping the "malpractices".
The Bangladesh Bank also instructed financial institutions to preserve the bank statements of borrowers in the loan file prior to loan disbursements to the clients' bank accounts.
The central bank report said asset quality of the NBFIs weakened in 2020 as the total non-performing loans and leases rose by 64% year-on-year to Tk10,050 crore, the highest amount ever.
The ratio of bad loans to total loans jumped from 9.5% in 2019 to 15% in 2020.
As per the stress testing report of the central bank, as many as 13 NBFIs were in the red or risky zone by the end of 2020.
A stress test on the financial institutions is conducted to assess the resilience on a standalone as well as a system-wide basis with different shock scenarios for credit risk, interest rate risk, equity price risk and liquidity risk.
The total net profit of the entire NBFI sector declined by 61% to Tk356 crore in 2020 as default loans rose alarmingly because of corruption by directors.
Consequently, the key profitability parametres, such as return on assets (ROA) and return on equity (ROE) plummeted. The ROA and the ROE were 0.4% and 3.9% respectively at the end of 2020, down from 1.9% and 10% a decade ago.