Inflation worry forces BB to squeeze credits

The central bank unveiled Monday a new monetary policy that limits credit flow to check inflation and improve country's financial stability while promoting job-centric economic growth.
Bangladesh Bank (BB) Governor Fazle Kabir announced the monetary policy statement (MPS) for the January-June period of the fiscal year (FY) 2017-18 at a press conference held at the central bank headquarters in Dhaka.
The MPS for the second half of the fiscal is particularly intends to help the sectors in achieving sustainable growth by holding in check inflationary pressures on the economy and discouraging money flow into less-productive sectors.
"The new monetary policy targets employment-focused growth with stability," the central bank chief said while explaining the main objective of the MPS.
The central bank, however, kept unchanged its domestic credit (DC) target at 15.8 per cent for the second half (H2) of the FY 18 while target of broad money (M2) supply came down to 13.3 per cent from previous 13.9 per cent.
"Although broader monetary policy targets (M2, DC) have been redesigned cautiously to support growth while balancing inflationary risks, vigilance and continuous monitoring is required as the monetary programme and economic development unfold," the MPS explains.
On the other hand, the BB enhanced its private-sector credit-growth target to 16.8 per cent against a previous projection of 16.3 per cent.
The revised private-sector-credit-growth target, however, is significantly lower than that of the existing level at 18.13 per cent in December 2017.
The growth in credit flow to private sector rose to 19.06 per cent in November 2017 on a year-on-year basis from 18.63 per cent a month before, the BB data showed.
The latest revision came against the backdrop of rising trend in the private-sector-credit flow in the recent months due to higher trade financing for settling import-payment obligations, particularly for food- grains, fuel oils and capital machinery.
Earlier on July 26 last, the central bank had projected in its H1 monetary policy for the FY 18 that private-sector credits would grow at 16.2 per cent in December 2017 and 16.3 per cent in June 2018 respectively.
Repo and reverse repo policy interest rates will, for the time being, remain unchanged at 6.75 and 4.75 per cent, respectively, according to the new MPS.
The BB governor also announced that the limit of advance-deposit ratio (ADR) of the banks would be rationalised within a couple of days.
"The revised limit of ADR will come into effect from June this year," the central bank chief said, without disclosing the limit.
Sources, however, said the ADR of all banks is likely to be re-fixed at 83 per cent for conventional banks and at 89 per cent for shariah-based Islamic banks. The existing ratios are 85 and 90 respectively.
Earlier on January 04 last, the central bank hinted at a bankers' meeting that the BB had planned to slash the advance-deposit ratio (ADR) to help check any possible liquidity pressure on the market due to 'aggressive lending'.
The macro-prudential steps to curb imprudent unproductive lending would include closer surveillance on adherence to prescribed Asset-Liability Management (ALM) and Forex Risk Management guidelines, a new directive requiring banks to rationalise their ADR to curb their overexuberance in lending, and stricter end-use surveillance on bank loans including import-financing commitments.
"The revised limit of ADR will be fixed considering the banks' capital adequacy and non-performing loans (NPLs)," Mr. Kabir said while replying to another query on the same issue.
The BB governor also rolled out a four-point programme for bringing dynamism in both the country's financial and capital markets during the period.
Under the programmes, the banks have been asked to avoid unduly high medium-or long-term investment-financing exposures to corporate borrowers, helping instead in corporate bond issuance on the capital market, using banks only as interim bridge-financing windows.
The banks will be encouraged to mobilize foreign savings of Non-resident Bangladeshis (NRBs) through sales of government's high- yielding Wage Earners Bonds. And handling their portfolio investments with Non-resident Investment Taka Accounts (NITAs) for NRBs will help further augment foreign-exchange inflows, simultaneously adding equivalent Taka liquidity on the financial and capital markets.
Work underway on further simplifying banking-channel transaction procedures relating to export of goods and services through internet-based e-commerce platforms that will also help further in augmenting forex inflows, according to the MPS.
Besides, the existing close monitoring and supervision will be continued to curb illegal money transfers using mobile phones.
"….H2 of the FY18 monetary programme retains domestic credit- growth ceiling unchanged at 15.8 per cent, adequate to accommodate the targeted 7.4 per cent real GDP (gross domestic product) growth and up to 6.0 per cent annual average CPI inflation," the monetary policy states.
The country's average inflation as measured by consumer-price index (CPI) rose to 5.70 per cent in December last from 5.64 per cent of the previous month due to higher food prices while point-to-point inflation also fell to 5.83 per cent from 5.91 per cent in November 2017.
The central bank's projections show average inflation to be around 5.7- 6.0 per cent in June 2018, assuming no further domestic or external shocks and a relatively favorable global inflation outcome.
During the remainder of the FY 18, food-inflation pressure will ease from imports and boro rice harvests, according to the MPS.
The government as well as the central bank had set the inflation target at 5.5 per cent for the FY 18.
The central bank is encouraging the banks to get rated by internationally reputable credit-rating agencies, which can help improve competition and governance, and market access.
"Continued improvement in intensive and intrusive supervision that can upgrade corporate governance and lower concentration risks and NPLs would support a more efficient monetary policy transmission mechanism," the MPS noted.
Among others, Change Management Adviser of the BB Allah Malik Kazemi, BB deputy governors Abu Hena Mohammad Razee Hassan and SK Sur Chowdury and chief economist Faisal Ahmed spoke on the occasion.

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