Govt move raises more concerns | The Daily Star
12:00 AM, April 03, 2018 / LAST MODIFIED: 01:46 AM, April 03, 2018


Govt move raises more concerns

The banking industry has been facing liquidity crisis since December last year when the central bank cut the loan-deposit ratio to 83.5 percent from 85 percent. The measure aimed at tackling the soaring private sector credit that climbed up nearly 19 percent. But the move boomeranged as it aggravated the liquidity crisis. Reckless irregularities at Farmers Bank worsened the situation prompting many state-run enterprises to pull out bulk deposits from private banks. As a result, many banks' capacity to invest almost came to a halt and they were running after deposits even at a double-digit interest rate to bring down the loan-deposit ratio within the new ceiling. The situation has not spared the stockmarket either as investors have been losing money for a quarter. Finally, directors of private banks entered the scene. They held a meeting with the finance minister on Friday and managed to bag 50 percent deposits from the government, up from 25 percent previously. On Sunday, they got more facility – a one percentage point cut in banks' cash reserve requirement (CRR) with the BB that would give them Tk 10,000 crore in fresh funds. The Daily Star talked to three experts – Dr AB Mirza Azizul Islam, Prof Mustafizur Rahman, and Ahsan H Mansur – to get their views on the recent development.



Former finance adviser to caretaker government

The decisions taken by the government and the central bank would increase the money supply in the market, but it would encourage banks to go for aggressive lending.

The excess money supply will increase default loans further as many banks frequently breach the rules and regulations while sanctioning loans.

Such practice has already eroded the depositors' confidence in the banking sector.  And, the latest decisions have contradicted the tightened monetary policy taken by the central bank just two months ago.

The central bank has set the private sector credit growth target at 16.8 percent against a previous projection of 16.3 percent at its monetary policy for January-June aiming to tighten the money supply. But the policy will not be effective because of the latest move amid pressure from the directors of banks.

The banks' directors, who enjoy political connection, will manage to get the majority of state-owned enterprises' deposits. As a result, the government fund will be at stake if weak banks managed their deposits.



Distinguished fellow of the Centre for Policy Dialogue

The government and the Bangladesh Bank are trying to solve the problems of the banking sector without addressing the governance deficit the sector has been facing for years.

The sector is going through volatility and uncertainty arising from mal-governance, but the government is trying to sort it out without addressing the governance issue. This solution can exacerbate the existing problems.

The CRR cut may help banks handle their ongoing liquidity crisis, but if the loan quality is not improved the situation may aggravate with new loans becoming bad.

Banks have to intensify efforts to recover default loans in order to reduce their provisioning against bad loans, which squeeze a bank's profits and capacity to invest further.

There won't be any inflationary pressure if banks make quality investments with the additional funds they would get from the relaxation.

The central bank should be given full independence so that it can perform effectively to regulate the banks.



Executive Director, Policy Research Institute

The standard CRR ceiling is 6.50 percent and above of the depositors' fund and the majority of the banks across the globe maintains the rules. But the local banks will keep 6 percent CRR with the central bank which is below the standard.

The move may create more 'Farmers Bank' as the commercial banks provide funds to the depositors from the CRR when they face an acute liquidity crisis. A lower CRR increases the risk for banks.

The country's current account deficit has recently surpassed $5 billion, so we need to address the problem immediately.

Tightened monetary policy and cautious fiscal policy can solve the deficit, but the latest move will aggravate the problem.

The government has just bowed down to the irrational demands of the directors of the private banks. The government should prepare a policy for the state enterprises so that they choose good banks to deposit fund.

The government should instruct state enterprises to park their funds with the banks, which have less than 10 percent non-performing loans and maintain a good CAMELS rating. 

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