Credit growth versus safe banking practices
Tuesday, 1 September 2009
Naimul Islam
OF late credit growth has become an issue. A cautious approach seems to be guiding the central bank. A Bangladesh Bank (BB) report, quoted by media, had earlier stated that credit growth surpassed deposit growth by 3.12 per cent in 2008.
The BB had also warned seven commercial banks for over investment of their resource, reminding them that any commercial bank investing more than 82 per cent of its deposits acquires a risk. The banks which were warned had all invested well above the ceiling.
One of them had invested 97.96 per cent of its deposits. The other banks have not been warned because they are yet to cross the risk ceiling. But, there is apprehension that they could cross it without proper guidance. Therefore, it would be correct for the central bank to watch the developments for sending an advice to a faltering bank, when and where necessary.
The developed economies are facing the deep economic crisis, perhaps due to failure of their central banks to supervise lendings by banks and other financial institutions. The problem in the developed countries started from carefree lending by financial institutions. Loans were extended without ascertaining the ability of the borrowers to repay. The loans were given to unproductive sectors as well. Can Bangladesh face such a situation? None can say for sure. But the regulatory supervision has to be there as part of a safe management strategy affecting the banking system, a vital pillar of the economy.
The BB recently advised the commercial banks to rein in their consumer credit programmes that seems to be among the most profitable ones. Loans for buying consumer durables like electronic goods and houses, have become specially popular with the borrowers. Satisfactory repayments could be an added incentive for the banks to lend more. But short term trends cannot be a basis for longer term lending. Large business houses in Bangladesh, it is reported, are cutting jobs as a consequence of the global economic crisis.
The executives of these organisations are among the top borrowers from banks' consumer credit operations including credits for buying land and houses. Even exporters and some categories of businesses are reported to be, slowly but steadily, affected by the global economic crisis. It could affect their ability to repay their loans. A large number of these loans could, thus, turn unserviceable at a point of time unless better developments take place.
Therefore, it would be prudent for the banks to continuously monitoring the situation to limit their credit expansion. Bank managements generally think that they know what they do.
But the regulators should not allow such risk taking in the wake of what happened to the developed economies.
OF late credit growth has become an issue. A cautious approach seems to be guiding the central bank. A Bangladesh Bank (BB) report, quoted by media, had earlier stated that credit growth surpassed deposit growth by 3.12 per cent in 2008.
The BB had also warned seven commercial banks for over investment of their resource, reminding them that any commercial bank investing more than 82 per cent of its deposits acquires a risk. The banks which were warned had all invested well above the ceiling.
One of them had invested 97.96 per cent of its deposits. The other banks have not been warned because they are yet to cross the risk ceiling. But, there is apprehension that they could cross it without proper guidance. Therefore, it would be correct for the central bank to watch the developments for sending an advice to a faltering bank, when and where necessary.
The developed economies are facing the deep economic crisis, perhaps due to failure of their central banks to supervise lendings by banks and other financial institutions. The problem in the developed countries started from carefree lending by financial institutions. Loans were extended without ascertaining the ability of the borrowers to repay. The loans were given to unproductive sectors as well. Can Bangladesh face such a situation? None can say for sure. But the regulatory supervision has to be there as part of a safe management strategy affecting the banking system, a vital pillar of the economy.
The BB recently advised the commercial banks to rein in their consumer credit programmes that seems to be among the most profitable ones. Loans for buying consumer durables like electronic goods and houses, have become specially popular with the borrowers. Satisfactory repayments could be an added incentive for the banks to lend more. But short term trends cannot be a basis for longer term lending. Large business houses in Bangladesh, it is reported, are cutting jobs as a consequence of the global economic crisis.
The executives of these organisations are among the top borrowers from banks' consumer credit operations including credits for buying land and houses. Even exporters and some categories of businesses are reported to be, slowly but steadily, affected by the global economic crisis. It could affect their ability to repay their loans. A large number of these loans could, thus, turn unserviceable at a point of time unless better developments take place.
Therefore, it would be prudent for the banks to continuously monitoring the situation to limit their credit expansion. Bank managements generally think that they know what they do.
But the regulators should not allow such risk taking in the wake of what happened to the developed economies.