Md. Parvez Alam
Stability of an economy is dependent on proper coordination among several macro-economic factors such as monetary policy, inflation rate, private sector credit growth, political environments etc. The recent downturn in the financial sector such as steep decline in share market indices, liquidity crisis in banking sector and intervention of government in determining the market interest rate indicates that the economy isn’t running efficiently due to the lack of prudent macroeconomic policies.
In FY-16, commercial banks were loaded with excess liquidity due to the lower demand for private sector credit which forced commercial banks to reduce the deposit rate as low as 6 percent which was almost equal to the inflation rate. It implies that depositing money into the banks, depositors would merely get a return from their investment which is equal to the rate of inflation. Therefore, the depositors who have adequate financial knowledge lost their interest to put their money at the banks.
The argument of setting higher interest rate on National Savings Certificate (NSC) was that they tend to give some benefit to the old age people and government employees, by investing pension fund in large mega projects. However, the harsh reality is that majority of investment in NSCs was done by wealthy businesspersons and bankers, looting the benefit of poor people. Savings Certificates issued by the National Savings Directorate (NSD) is a major stumbling block in achieving market-based interest rate structure.
According to NSD statistics, the outstanding stock of NSD instruments increased from a little over Tk. 1 trillion in FY15 (accumulated over the last 45 years since independence in 1971), to almost Tk. 2.4 trillion within a 3-year period through FY18. This massive diversion of funds away from the banking system contributed to the serious liquidity problem in the banking system and limited the balance sheet expansion of commercial banks and their profitability. Undertaking a number of mega projects and financing the deficit budget from both NSCs and banking sector by the government, the liquidity crisis has deepened in financial sector.
In order to control the money supply and tackle the inflationary pressure in the economy, on 30th January 2018 the Bangladesh Bank instructed banks to adjust their advance to deposit ratio (ADR) to 83.5% for conventional banks and 87% for Islamic bank, which was previously 85% for conventional bank and 90% for Islamic banks by Jun 30, 2018. To comply with the Bangladesh Bank instructions, commercial banks started to offload their chunk amount of shares which leads to rapid decline of the capital market indices and perplexed the general investors.
Again, the aggressive lending policy by the fourth generation bankers created unprecedented challenges to adjust ADR ratio and the banking industry was faced with the greatest liquidity crisis in history. On 1st April 2018, Bangladesh Bank intervened to hold the liquidity crisis by reducing the CRR ratio to 1% and repo rate to .75 basis point and increasing the deposit of government enterprises in private banks. It has been considered, according to many economists, to be a policy demising the interest of depositors and gearing the influence of Bangladesh Association of Banks or BAB over the regulators which ultimately acted as incentive for bankers.
By realizing that rising market interest rate which crossed the single digit, fueled by severe liquidity crisis, would further deteriorate the private sector investment which has remained stagnant for last few years despite several government incentives. The recent move of the government to determine the market interest rate (deposit rate 6% and 9% lending rate) to support the growth of private sector investment, is another questionable action of the ministry of Finance.
In the budget FY-18-19 the government has lowered the corporate tax rate for banking industry by 2.5% so that bankers are motivated to lower the lending rate to 9% to boost up the private sector investment. Economists opined that such kind of policy implication will not be much helpful to rectify the prevailing underlying fault line such as poor corporate governance, sprawling amount of non-performing loan and unfair intervention of Bangladesh Association of Bankers (BAB).
The incidents that have been occurring over the last few years in the financial sectors in Bangladesh are undoubtedly due to the lack of prudent macroeconomic policy formulation, implementation and coordination among the respective authorities. The market interest rate is supposed to be determined by market mechanism. Bankers are yet to adjust the deposit rate and lending rate as deposit growth rate is not up to the mark. The prevailing higher interest rate in NSCs, pitiable governance practice in banking industry, phlegmatic behavior of BB is the main driving force of this downturn in banking industry.
If the government would finance their budget deficit by borrowing from banking sector it could reduce interest expenses from public exchequer and use this fund in productive sectors. Central Bank already took measures to address the liquidity situation, for instance, reducing the Cash Reserve Ratio (CRR) to 5.5%. However, sale of NSCs can only be ensured to those in need of social safety net. Also, it is high time Government should focus on money market (banking system) and capital market (bond) as alternative source of funding.
Moreover stringent rules of BB, which would improve the governance practice of banks and reduce the bubbling up of NPL. The increased efficiency in credit management would increase the loanable fund of banks which could have a positive impact on interest rate. The reduction of higher interest rate in NSCs, balancing of borrowing form NSCs and Banking sectors and independent role of Bangladesh Bank and check and balance of regulation in banking industry can ensure the stability in banking industry and smooth economic development.
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