BB must cut bad loans, spread to achieve MPS goals: CPD

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FE Report
The Bangladesh Bank should rein in growing bad debt, cut interest rate spread and allow private sector to borrow from external sources if it wants to boost investment in the country, a think tank said Thursday.
The Centre for Policy Dialogue (CPD) said bad debt is piling up in the country's banking system and credit to the private sector is still "too costly" and its scope "too limited", which are acting as key drags on the overall investment climate.
The CPD made the observations after commenting on the BB's just-released July-December monetary policy statement (MPS), which projected a Gross Domestic Product growth of six per cent, with credit to the private sector expected to grow at 16.70 per cent.
The BB said its latest monetary policy aimed at boosting investment amid an uncertain global economic situation and keeping the interest rate under check despite prices showed signs of edging up since April this year.
Debapriya Bhattacharya, a senior fellow of CPD, said BB's half-yearly monetary policy supports the country's current economic trend, demand for growth, current investment situation and also the government's financial needs.
In the backdrop of the global economic recession, the country now needs an "active" policy --- rather than a supportive one --- from the central bank to achieve its stated objectives, he said.
The former ambassador said the economic growth can even beat the central bank's projection of six per cent provided the BB spur private sector investment after tackling some of the key impediments that are holding back growth.
Outlining the issues, the CPD said the monetary statement should have provided some policy guidelines about dealing with the existing loans overhang as total classified loan for first three quarters of FY09 stood at Tk 235 billion, which is 11.12 per cent of total outstanding loan.
"Besides, some 2,196 defaulters hold loans of Tk 154 billion," he said, quoting official statistics.
He said the BB should form a high-powered bank reform committee to suggest practical mechanisms to deal bad debt, reduce the interest rate spread and ensure availability of borrowing by the private sector from the external sources.
The CPD said lending rate --- which hovers around 12-13 per cent --- remains one of the major impediments to investment in Bangladesh and there is no sign of its decline.
"The interest rate spread remained as high as 5.5 per cent in May 2009 in comparison to 4.8 per cent at the end of FY09 despite easing of inflationary pressure and enforcement of 13 per cent cap on lending rate for major sectors."
Dr. Debapriya regretted that although the spread is the key issue behind the sagging investment scenario in the country, it was not addressed, let alone mentioned, in the monetary policy.
The economist said the country's macroeconomic situation has been in the 'comfort zone' during the current fiscal year as the commodity prices have come down while exports and remittance are growing at double digit rate.
But he warned the commodity prices might shoot up again due to domestic and external factors by the end of the year or at the beginning of the next year. "The BB should keep that in mind."
He said the government's excessive loans from the local banks could crowd out the private entrepreneurs and also fuel inflation if the money is not invested in employment-generating sectors.
"If the government takes huge loans from the banking sector, but does not invest in productive projects that create employment and at the same time investment in the private sector is not revived, we may face another round of price-hike thanks to our own monetary policy," he said.
"The central bank, therefore, has to play an active role in monitoring the price situation."
The CPD said the effectiveness of the monetary policy would largely depend on the capacity of the BB to carry out its stated objectives and the effectiveness of related policy implementation.
He said the monetary policy should also give attention to export-oriented, labour-intensive industrial sectors on top of agriculture to attain the projected growth.
"Bangladesh has to achieve growth in industrial sectors if it really wants to clock over six per cent growth."
He also hailed the BB's willingness to use its bulging foreign exchange reserve to boost output. "But it remains to be seen how it disburses money from the reserve to the productive sectors," he said.
Dr. Bhattacharya urged the central bank to integrate micro-finance within its policy framework, as it has been a major supplier of credit to private sector, particularly in the rural economy.
At the end of the FY08, total outstanding micro-credit was 7.1 per cent of total credit to private sector and 2.7 per cent of gross domestic product.
He welcomed the central bank's decision to introduce sovereign credit rating of Bangladesh, which will cut costs of borrowing from external sources.
Acting executive director of CPD Anisatul Fatema Yousuf, research fellow Dr Uttam Kumar Deb, senior research associate Towfiqul Islam Khan and research associate Tapas Kumar Paul were present during the briefing.