BB withdraws excess liquidity from market with higher CRR

The central bank raised the cash reserve requirement (CRR) by 50 basis points to 6.50 per cent for the commercial banks.

The move is aimed at reducing inflationary pressure on the economy by way of withdrawing excess liquidity from the market.

Under the new rules, the commercial banks will have to maintain 6.50 per cent CRR with the central bank from their total demand and time liabilities on a biweekly basis.

The banks will be allowed to maintain the reserve at 6.00 per cent instead of the existing 5.50 per cent on daily basis, but the biweekly average has to be 6.50 per cent in the end, said a circular issued Monday by the Bangladesh Bank.

The new CRR will be effective from today (June 24), according to the circular.

"We're hopeful about mopping up over Tk 32 billion in excess liquidity from the market by raising the CRR. But it will not squeeze the credit flow to the private sector because excess liquidity is now available in the country's banking system," SK Sur Chowdhury, deputy governor of Bangladesh Bank (BB), told the FE about the impact of inflation-control measure.

The central bank expects the inflationary pressures on the economy to ease in the coming months following the latest policy intervention, the deputy governor noted.Inflation in the country, as measured by consumers' price index (CPI), rose to 7.48 per cent in May 2014, up from 7.46 per cent of the previous month, on point-to-point basis mainly because of increase in prices of food items.

The overall excess liquidity with the commercial banks stood at Tk 1022.23 billion, as on May 1 last, due mainly to lower credit demand from both public and private sectors, according to the BB officials.

Most of the excess liquidity had already been invested in the government-approved securities as a risk-free investment for banks. They made it clear that excess liquidity does not necessarily mean idle money for the banks.

"We raised the CRR for a number of reasons. Recently the ministry of finance decided to temporarily suspend Treasury auctions, and as a result, banks rushed to the central bank to park their excess liquidity through our interest-bearing reverse-repo facility," said Hassan Zaman, chief economist of the BB.

This has sharply increased the cost of this facility to the central bank and, by extension, to the taxpayers since this implies that the BB can contribute less to government revenue, the chief economist added.

"By raising the CRR we save a portion of these costs. Also private- sector credit-growth figures show that there is sufficient space for banks to lend to their customers if they wish to. So raising the CRR will not affect investment," Dr. Zaman explained.

 "Moreover, this move also helps us in keeping to our reserve money targets which will help in bringing non-food inflation down further. So, overall, there are lots of advantages to this as entrepreneurs won't suffer from a fund shortage, it has inflation benefits and lowers the interest burden on the public," he noted.

Salehuddin Ahmed, former BB governor, said there was no valid reason for the enhancement of CRR.

But he, however, said it would help contain the rising trend in the inflation and discourage speculative investment to some extent.

The new CRR comes after a gap of nearly three and a half years. The central bank last increased the ratio by 0.5 percentage points to 6.0 per cent on December 1, 2010.

The private-sector credit growth stood at 11 per cent in May 2014 on a year-on-year basis but it would be round 15 per cent ii both short-and long-term foreign currency loans, received by the private sector, particularly corporate entities, another BB official said.

Talking to the FE, a senior official of a leading private commercial bank said the private sector credit growth may hamper in the near future due to increase in the CRR.

Besides, the cost of doing business of the commercial banks will increase, he noted.

On the other hand, the government borrowed Tk 254.14 billion from the banking system as on June 19 last against Tk 299.82 billion target for the outgoing fiscal year (FY) 2013-14, the BB data showed.