BB asks banks to ensure stability in the sector

FE Team | Published: April 11, 2011 00:00:00 | Updated: February 01, 2018 00:00:00

FE Report
The central bank has asked the country's top bankers to take effective measures for ensuring stability in the country's banking sector rather than profitability in 2011. The commercial banks have also been advised not to charge more than 14 per cent interest rate on working capital to industries. The advice came at the first meeting of bankers for this calendar year held in the central bank Sunday with Bangladesh Bank (BB) Governor Atiur Rahman in the chair. "The banks will have to do everything that is necessary for ensuring stability in the banking sector," Senior Deputy Governor of the BB Nazrul Huda told reporters after the meeting. He also said the banks usually consider profitability as their prime business objective, which sometimes affects the stability in the banking system. "We've put special emphasis on ensuring the banking sector's stability considering the instable situation in the country's capital market in 2010," the BB deputy governor said while explaining their latest moves. The credit-deposit ratio (CDR) has been identified as a source of instability in the banking system, Mr Huda said, adding that the central bank had found higher CDR in many banks. "The CDR reached 85 per cent suddenly in December last which hit 86 per cent in January this year. But the CDR was ranging between 79 per cent and 81 per cent in the last 36 months," he noted. The central bank earlier asked the commercial banks to bring down their CDR to a safe limit by June 30 this year. The conventional commercial banks will have to bring down their CDR to 85 per cent while Sharia-based Islamic banks to 90 per cent within the timeframe, set by the BB on February 20 last. "Average CDR of all banks should not cross 80-81 per cent," Mr Huda said, adding that the banks will have to maintain a balance between credit and deposit growth to avoid financial risk. The central bank also advised the banks to take necessary measures to avoid their assets and liabilities mismatch, he added. The deputy governor further said the BB has also worked to amend the existing banking companies act relating to investment in the capital market from the total deposit of a bank. Currently, the banks are allowed to invest 10 per cent of their liabilities (deposits) in the share market. "This is very high. Such higher investment is not allowed anywhere in the world," Mr Huda said, adding that there is no scope for investment from the depositors' money. "We've taken these precautionary measures to ensure stability in the country's banking system," a BB senior official said. The BB will take punitive actions against the banks concerned if they fail to meet the June 30 deadline, he added. The central bank has requested the banks not to cross 14 per cent interest rate on working capital to industries, Mr Huda said. "Now banks are free to fix their interest rates on lending after withdrawal of cap on lending rate by the central bank," he added. In March this year, the BB withdrew the lending rate cap in all sectors barring two - agriculture and industrial term loan - after nearly two years, following the increase in deposit rate that created a mismatch between the cost of funds and the interest rate ceiling set by the central bank on lending operations by the banks. "We hope that the banks will behave rationally for fixing interest rates on lending," the BB deputy governor said. Chairman of the Association of Bankers Bangladesh (ABB) K Mahmood Sattar told reporters that they will discuss these issues in their next meeting, which is scheduled to be held in the next month. Meanwhile a top BB official said Sunday the central bank will launch an investigation into the banks named in the probe report on share market crash which was submitted to the finance minister on April 7 last. "We'll start our own investigation against the banks after receiving the probe report," he said while replying to a query. He also said actions will be taken against the banks in line with the BB's investigation report. The probe report said some banks pocketed immense profit violating the rules and regulations. Some of the banks were also involved in fuelling the stock prices in 2010. The report has recommended that the BB take action against the financial institutions in question. The central bank of Bangladesh identified that at least 16 commercial banks particularly private commercial banks (PCBs) crossed their exposure limit in the capital market investment last year. "Currently, at least two PCBs have over 10 per cent investment of their total liabilities in the capital market," a BB official told the FE.