Banking sector developments and real economy

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Shamsul Huq Zahid
How is the state of the country's real economy?
To get an answer, one should not fix one's eyes on stock market overflowing with enthusiastic investors. For, there are genuine reasons to be misled by developments there.
It would be rather worthwhile to take into cognisance the state of affairs in the banking sector that speaks of the health of the real economy than anything else.
It is the primary job of the banks to take deposits and lend the same to their respective clients. And the spread between deposit and lending rates fetches some profit for the banks. But the ups and downs in deposit mobilization and lending activities do not remain confined only to the profitability of the banks. Those are very much relevant to developments in other areas of the economy.
The higher deposit mobilization by banks demonstrates the people's ability to save money after meeting their consumption needs. This is only possible when the cost of living is low or within a tolerable limit.
Similarly, the demand for credit from the private sector depends on a variety of reasons, including business confidence and political environment. Actually, the deposit mobilization and credit flow are inter-linked and other economic and non-economic factors have tremendous influence over them.
The banking sector has been passing through a difficult time in the recent months as far as their deposit mobilization and lending are concerned. Though decline in deposits has not created much of problems for most banks which are floating on excess liquidity because of poor demand for funds from private sector investors, some banks are still having problems because of the slow growth of deposits. The latter are still offering rates on deposits higher than many other banks, risking their profitability.
A newspaper report quoting a recent report of the Bangladesh Bank said the deposits of the scheduled banks declined by about Tk 7.0 billion in July last over that of the previous month. According to the central bank report, the growth in deposits with the scheduled banks during the last fiscal (2006-07) was 17 per cent. In the first half of that fiscal, the growth of same was 9.0 per cent and in the second half 7.51 per cent. In the fiscal 2005-06, the deposit growth rate was over 20 per cent. However, the deposits with scheduled banks recorded a negative growth in the first month of the current fiscal, 0.38 per cent, over that of the previous month.
In the last half of the last fiscal, the flow of credit marked a growth of only 4.82 per cent. The situation has not improved much the first three months of the current fiscal, resulting in a further bulge in excess liquidity with banks.
The reasons for slow growth in both deposits and lending in the banking sector are more or less known to all concerned. It is not possible to improve the situation overnight even if the men in power want to make it happen. The administration cannot ask people to save more money and deposit the same with banks. Because of both internal and external factors the cost of living has gone up and in such a situation the people cannot save enough money to make deposits with banks. Moreover, when the banks which are experiencing poor demand for funds from investors and others in the private sector, are offering unattractive rates of interest on deposits, the people would, naturally, prefer to invest their savings in some other places, including the stock markets, that are promising better returns. The negative growth in deposits in last July, possibly, was the outcome of the savers' natural instinct.
The poor demand for funds is hurting the banks more than anything else and the management of most banks is worried over their profitability in the short-term. The government of the day being aware of the factors that have eroded the business confidence, of late, has been trying to mend the situation. It has promised to avoid certain actions responsible for creating panic among the businesses. But as of now the signals from official agencies concerned, have been mixed. So, the private sector is yet to come out of the morass of despair and display its agility that was prominently visible even during the months of political turmoil in the last calendar year.
The price situation and the less-than-usual business confidence seem to be two major obstacles to the efforts for putting the economy on the right track. It might be difficult for the government to address the external factors responsible for price hike but it can reasonably ease the situation by removing irritants created domestically. The ongoing process of market intervention is bound to produce some limited results on the price situation and might prove counter-productive in the long run. Moreover, such intervention is not at all compatible with the reforms process that the present administration has been pursuing in some other areas of the economy. The market forces need to be allowed to play their part without any hindrance. Under the prevailing circumstances, the task might prove difficult for the government. Yet it has to be accomplished.