Draw up country risk management guidelines

Bangladesh Bank yesterday asked banks to draw up country risk management guidelines focusing foreign nations, all aimed at absorbing unexpected economic shocks stemming from abroad.

Banks will have to define the risks from foreign countries, meaning those with which banks get involved though business with both public and private companies.

As a part of the move, the central bank issued guidelines on country risk management (GCRM) for banks.

Banks should institute appropriate procedures for dealing with country risk problems, according to a central bank notice.

They should have in place contingency plans and clear exit strategies of their businesses, which would be activated at times of crisis.

Appropriate systems and procedures should be laid down with the approval of the boards of banks to handle situations involving significant changes in conditions in any country.

For the present, only in respect to the country, where a bank's net funded exposure is 2 per cent or more of its total assets (mainly loans and advances), the bank is required to implement the GCRM policy.

Bank will have to classify the ratings of the countries based on five categories – insignificant, low, marginal, moderate and high.

The mapping of the risk categories is being considered in tune with the sovereign rating provided by the global credit rating agencies like S&P, Fitch and Moody.

Bank will have to keep general provisions, with effect from the first quarter of 2022, against their net funded exposures in different countries on a graded scale ranging from 0.25 per cent to 20 per cent.

If a country's rating is insignificant, banks do not have to keep any provision, but they have to keep aside funds for countries whose ratings span from low to high.

A bank's exposure with companies of a foreign country will be calculated to deduct its debts from credits.

For instance, if a client of a local bank imports products from a company of a foreign nation, it will be considered a debt of the local lender.

If the same bank exports goods and services to another company of the same foreign nation, it will be considered credit.

Banks will have to maintain the provision on the net exposure.

The country's businesses are usually doing business with companies located in foreign countries which have strong ratings, said a central bank official.

"Banks are not required to keep much provisions against their foreign trade," he explained.

The central bank guidelines will come into force from January 2022.

The GCRM policy will be periodically reviewed by the boards of banks on the basis of the experience gained on the respective foreign countries.

The frequency of periodic reviews of country risk ratings should be at least once a year with a provision to review the rating of a specific country, based on any major events in that country, where bank exposure is high, even before the next periodical review of the ratings is due.

Banks will have to consider the macroeconomic situation of a country while preparing its risks.

In addition, the analysis of country risk should also take into consideration the country's social, political and legal climate.

The willingness and ability of the government to recognise economic or budgetary problems and implement appropriate remedial action will have to be given emphasis.

The degree to which political or regional factionalism or armed conflicts are adversely affecting government of the foreign countries also have to be taken into account while preparing country risks.