Banks: Easing the stress factors

The Bangladesh Bank (BB) as the guardian and regulator of the country's financial banking sector must exercise its watchdog functions to keep the banking system in a healthy state. It needs to set guidelines to that end, and apply its supervisory powers for the banks to comply with. But it is also important that the BB on its part should go about doing its jobs leaving room for the banks to function without feeling too stressed while complying with its directives. A report in this paper on last Thursday stated that a delegation from the Bangladesh Association of Bankers (BAB) met Prime Minister Shaikh Hasina at her office to apprise her of various problems besetting the banks. They maintained that the lending-rate cap in a situation where the deposit rate is going up, despite the informal 'instruction' that have been given by the BB to the commercial banks, is hurting the operations of the banks. The central bank has hardly any mechanism to enforce its compliance by all banks. Then again, the question comes here to the fore whether the central bank, following the financial sector reforms that were implemented over the past two decades to ensure functional efficiency of the commercial banks, has any remit now to fix, formally or informally, any deposit rate. Furthermore, the rationale for capping the lending rate in a situation where the inflationary pressure remains too strong is also weak. Any mismatch between the lending rate and the deposit rate is bound to squeeze the spread to a critical level, impacting adversely the operational performance of the banks, their profitability and also their capacity to contribute to the public exchequer in the form of taxes. Meanwhile, the BB's earlier directive to the commercial banks to maintain cash reserve ratio (CRR) and statutory liquidity reserve (SLR) with it at a higher level than before, did also figure in the discussions of the members of the BAB with the Prime Minister. The reason why the CRR and SLR have been raised by the central bank under the given circumstances where taming the inflationary pressure remains a high priority for the BB, is understandable. However, here, too, the timing of this measure, along with the need for commercial banks to maintain higher capital adequacy ratio (CAR) in line with BASELII requirements and to bring down their credit:deposit ratio (CDR) at the same time for safety of their operations, merits some consideration. The banks should not be put in a situation of funding constraints at this stage to meet their obligations for settling the outstanding import letters of credits (LCs), when the costs of imports, including those of food grains, have been on a marked rise and also for disbursing already committed credits to their borrowers. The BAB has made strong pleas for some adjustments in the CRR, SLR and CDR and also for extension of time for raising banks' respective CAR, in order to help overcome the problems that they are facing now. All concerned would expect that some appropriate responses would come from the authorities concerned to the proposals that have been made by the BAB. Yet then, it must be noted here that such responses should not compromise the basic objectives of the monetary policy to ease off the inflationary pressure to provide relief to the common people and to ensure compliance with prudential requirements, for operational safety of the banks that essentially deal with depositors' money. The banks would like to find some breathing space from their current tight liquidity position. The regulatory moves on them by the BB are, no doubt, justified in the context of the overall policy objectives about keeping the country's financial sector in a sound state. But the imperatives for fine-tuning the policy, in full recognition of to-day's specific circumstances in the country's financial sector, cannot be ignored at the same time. On their part, the management of the banks should also be guided by a sober realisation that they have a cardinal duty to keep the safety or health of the financial sector uppermost in their consideration.