Credit decline for private sector

Overheated, the Bangladesh economy has unleashed inflation well above 12 per cent and the central bank had no other option than to intervene in order to contain the soaring rate. In a situation like this the Bangladesh Bank (BB) has done what the central banks anywhere in the world do: go for a squeeze on the lending of credit and also an increase in policy interest rates. To that end, the central bank here has set the safety limit of credit deposit ratio (CDR) for banks. For normal banks the CDR has been fixed at 85 per cent and for Sharia-based Islamic banks it is at 90 per cent. Still the risk-reduction measure aimed precisely to bring down inflationary pressure has not been equal to the task so far. Clearly, the main victim of the tightening of the credit flow has been the private sector and the latest available figure shows a decline in the rate of growth of credit to private sector to 21.98 per cent in September last from 23.19 per cent in the previous month, August that is. The problem seems to have been further exacerbated by the government's heavy borrowing from the commercial banks. This, as anyone can see, is not a good sign for the economy which may very well be heading for stagflation -or is the market already grappling with it? Credit squeeze has its negative bearings in a number of ways. Although the BB in its latest half-yearly monetary policy statement (MPS) has made it quite explicit that its objective is to discourage credit disbursement for unproductive purposes, ranging from speculative areas and real estate businesses to stock market, the measure has not made any significant impact on the market's inflationary trend. The most notable negative impact of the credit crunch is felt in the manufacturing sector where production suffers and employees get unemployed. The overall impact of this is economic stagnation, which is undesirable. The central bank has reportedly a target of bringing the credit growth rate in the private sector to just 18 per cent by the end of fiscal year 2012, from 25.5 per cent at the end of the last fiscal year. One wonders if the central bank's intervention through its monetary policy came too little too late. Before the credit flow peaking to its summit on a year-on-year basis by a 21.98 per cent in September, 2010, it showed unmistakeable signs of the trend. It was then that the BB needed to act promptly. Now even the tighter monetary policy measure seems to be inadequate for the purpose. There is no knowing if the financial advantages, taken out of augmented credit flows to some local businessmen holding dual or even triple "citizenship" or permanent residential status abroad, have not found channels other than legal to end up on foreign shores. About one thing though there is no doubt that the banks' profit depends on continuous rolling of money and when that stops, the government too is directly affected as a result of reduced revenue income. So it is a dilemma for the government. Its borrowing has further weakened the lending capacity of the banks. It is now incumbent on the government to slash, first of all, its expenditure on unproductive heads. Credit, moreover, should precisely be made available to the target-oriented areas within a specific timeframe.