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Cost of funds index launched for non-banks

Star Business Report
The central bank yesterday introduced a cost of funds index (COFI) for non-bank financial institutions, which would help the institutions set base interest rates properly for borrowing and lending and manage their treasury efficiently.
The move is the first of its kind for non-bank financial institutions (NBFIs) in South Asia. India introduced a base rate system for banks a decade ago and revised
it in 2010.
"The index will give clients a better idea about the lending rates," said Bangladesh Bank Governor Atiur Rahman at the launch of the index at the BB headquarters.
The governor also said he is considering introducing the same index for commercial banks to create a level playing field for major financial market intermediaries.
Cost of funds index launched for non-banks
FROM PAGE Bl
Mahfuzur Rahman, executive director of the BB, chaired the programme, also attended by deputy governors and chief executives of different NBFIs.
COFI will be determined on the basis of weighted average interest rates paid by the NBFIs on funds deposited with them or borrowed from other institutions, especially the commercial banks.
From now, an NBFI will be able to know other NBFIs' cost of funds, and can set its interest rates accordingly—based on the market.
Initially, the BB will post NBFIs' COFI on its website on a monthly basis.
The governor said banks and NBFIs are independent to determine interest rates based on the market. But their capacity and efficiency in managing the treasury affect the clients. "COFI will be used as a reference rate and NBFIs will easily be able to set their interest rates," the governor said.
He also believed the introduction of the index would rationalise the interest rate structure and create healthy competition among the NBFIs.
NBFIs welcomed the move and said they are going to be benefited.
"It (COFI) will improve our overall treasury management," said Asad Khan, chief executive of Prime Finance and chairman of Bangladesh Leasing and Finance Companies Association.
Khan said the index will help them compare each other's cost of funds and interest rates.
"If I see my organisation's cost of funds is higher than another NBFI, I can be cautious and take actions to improve our treasury management," he said.
There are 31 NBFIs in the country. Of which, three are government-owned and the rest are private entities. These organisations had to rely on banks for their entire funds five years ago.
The situation is changing fast as the NBFIs start collecting deposits directly in the wake of a hike cost of funds from the banks.