New monetary policy seen to rein in lending, bankers wary

The Bangladesh Bank will try to rein in the lending growth rate and prevent dangerous debt-fuelled bubble in the monetary policy it is going to announce for the second half of the current fiscal year, according to policymakers.

The bankers, however, have urged the central bank not to curb the loan flow, arguing that the measure will prove counterproductive, hitting investment and slowing down Bangladesh’s journey towards achieving the status of a middle-income country.

Economists have spoken in favour of a contractionary monetary policy, saying the government should keep an eye on the destination of the private sector credits in the election year.

Bangladesh Bank Governor Fazle Kabir will announce the monetary policy for the January-July period on Monday.

In the monetary policy for the first half of the 2017-18 fiscal, the central bank set a target to let private sector credit grow by 16.5 percent, but borrowing went as high as 19 percent until December.

Moreover, the banks are buying dollar from the central bank due to lack of foreign currency, creating a pressure on taka.

Fazle Kabir

Inflation is also rising. The point-to-point inflation rate stood at 5.83 percent in December, according to the Bangladesh Bureau of Statistics.

Finance Minister AMA Muhith had planned to keep the rate within 5.5 percent in the budget for the current financial year.

He also hinted at lowering the ceiling on advance to deposit ratio or ADR, which measures loans as a percentage of deposits, at a programme on Sunday.

Speaking at a conference of state-owned Rupali Bank, he said the ADR in the banks is higher and needs to be contained. ADR ceiling was set at 85 percent in the monetary policy for the first half of the current fiscal year.

It rose to 78.9 percent in September from 78.2 percent in June 2017, according to central bank data.

“Bangladesh Bank is responsible for checking it. This year, they need to be extra-cautious, as it’s an election year. The cash flow will increase and a good amount of black money will circulate,” Muhith said.

AMA Muhith

In the meeting with bankers on Jan 3, Governor Kabir said the ADR would be cut in the new monetary policy.

A central bank official related to the monetary policy told bdnews24.com on condition of anonymity that keeping inflation at tolerable levels by restraining credit growth will be the main goal of the new monetary policy.

It will also keep an eye so that the contraction of credit growth rate does not affect the growth of GDP, the official said.

“It will be a cautious monetary policy in continuation of that for the July-December period. But the private sector will get as much credit as necessary to increase investments for the expected growth,” he said.

The government has set a 7.4 percent GDP growth target for the current fiscal year. Bangladesh’s economy grew by 7.28 percent in 2016-17, topping the target of 7.2 percent.

Syed Mahbubur Rahman

The bankers fear contracting the ceiling for private sector lending growth rate will negatively affect GDP growth.

The central bank has held meetings with economists, businesspeople, bankers and citizens before finalising the monetary policy.

The Association of Bankers, Bangladesh or ABB recommended not slashing the credit growth rate, saying in a letter to the governor that the government’s need for borrowing might rise to speed up development projects ahead of the election by the end of this year.

ABB Chairman and Dhaka Bank Managing Director Syed Mahbubur Rahman told bdnews24.com the banks are playing a key role in achieving the target of getting the middle-income country status by 2021.

“The banks will be in trouble if the central bank suddenly tightens control on the flow of loans,” he said.

Ahsan H Mansur

“We can’t cut the credit growth rate even if we want to, because customers have opened LCs and we’ve given guarantees against those,” he added.

Private think-tank Policy Research Institute’s Executive Director Ahsan H Mansur thinks the flow of money in the country will rise ahead of the election.

In his view, the government will need more money to spend on the development projects by the end of its term, leading it to borrow more from the banks.

“That’s why I think the monetary policy should be contractionary; otherwise it will be difficult to maintain balance in the economy,” he said.

“The inflation has risen above the target while the dollar is gaining on taka. There is a bigger pressure on import. Private sector credit is also high. So, on the whole, the new monetary policy needs to be contractionary,” he added.

Mansur also said the government should look into how the bank credits are being used in the private sector.