Referring to the operations of a large number of banks in the country at present, Dr A B Mirza Azizul Islam suggested merger of some banks to reduce interest rates of loans and advances.
Besides, the Bangladesh Bank (BB) may consider fixing an upper limit for loans and advances, as the banks are not functioning competitively in the market, the former finance adviser said on Tuesday.
He also opined that depreciation of local currency may stoke inflation, as it will increase domestic market prices of most of the imported goods, like - machinery, raw materials, and intermediate and final goods etc.
Mr Islam said these while addressing the second AKN Ahmed Memorial Lecture on central banking, titled 'The Role and Functions of a Central Bank'. The Bangladesh Institute of Bank Management (BIBM) organised it at its auditorium in the city.
The BB Governor and the BIBM governing board chairman Fazle Kabir chaired the programme, while the BIBM director general Md Nazimuddin delivered the welcome address.
Talking about high lending rates of the country's banks, Mr Islam said, "There are too many banks in Bangladesh. It can be reasonably assumed that if the volume of business is low, the businessmen will try to charge higher prices to reach their revenue targets."
"Some bankers privately admit that they fix a ceiling of interest rate for deposits and a floor rate of interest for advances through their associations."
Despite existence of a large number of banks, they are not operating in a competitive way. The authorities concerned should consider how the number of banks can be reduced by implementing mandatory mergers, he opined.
The former caretaker government adviser also said the central bank can consider whether an upper limit should be fixed for loans and advances.
However, implementation of the policy would require strong monitoring to ensure that the ceiling is not subverted by adopting unfair means, such as charging higher processing fees or bribes to process loan applications, he added.
Mr Islam also said efforts should be strengthened to recover non-performing loans (NPLs) and deal with their underlying causes.
The BB should take initiatives to bring about legal reforms, needed to penalise the defaulters quickly and visibly.
Indicating to recent discourse over depreciating taka against US dollar, Mr Islam said depreciation is a macro-economic policy tool that a country may need to deploy when it suffers from persistent imbalance in external accounts, and the deficit cannot be financed within the limits of sustainable external debt service.
"There is no such situation in the country at this moment, as the exports and remittances are maintaining a healthy growth."
The central banks across the world do intervene in their respective foreign exchange markets from time to time in order to achieve broader macro-economic goals. But, in Bangladesh, the need for currency depreciation is often demanded by exporters.
Mr Islam said, "It should be reiterated that the depreciation will increase domestic prices of most goods-imported machinery, raw materials, and intermediate and final goods. As a result, it may stoke inflation."
The garments industry is substantially dependent on imported items, including chemicals and fabrics. Depreciating taka will cause an increase in prices of these inputs in the domestic market.
Furthermore, labourers of the garment industry may press the demand for higher wages more forcefully.
The garment exporters frequently complain that they are facing pressure from the foreign buyers to reduce item prices in terms of foreign currency, while the depreciation might well add fuel to this pressure, he added.
Speaking at the programme, the BB governor said lending rates of the banks are now higher due to some reasons, like - lower growth of deposits, high dependency on savings certificates, and foreign exchange rate etc.
Echoing Mr Islam's remarks over depreciation, he said devaluation of taka may increase domestic prices of commodities, which will eventually create inflationary pressure.
In terms of merger of banks, the governor said there have been discussions in the central bank about the issue, and the authorities concerned are paving the way to bring necessary amendments in relevant acts.
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