Return of the vicious circle
Friday, 12 March 2010
Mahmudur Rahman
In spite of the very difficult circumstances of rate ceilings and a lack of safe borrowers, the banking sector returned exceptional profits last year. A leading banker had attributed the success to "aggressive banking" without really elaborating on what this was. Fair enough. He and his colleagues in the sector had done what was expected of them.
High liquidity from remittances and deposits were balanced out by lower deposit rates and the expectation that government borrowing would increase once the Annual Development Programme (ADP) swung in to full gear and the international recession came out of its slump. Another banker had been upbeat about this recovery towards the middle of last year.
Come March 2010 and the recovery in Europe and US is sluggish. The Government of Bangladesh has implemented only 30% of its ADP causing it to slash the target downward. In between exports and remittances have both taken dips that while yet to be alarming are red flags. The worst news for the banking sector is that the government has nearly halved its borrowing buoyed by the near trebling of its National Credit Scheme sales where the depositor the finds best rates of return under the given circumstances for their money.
This development sends strategic planning into somewhat of a tizzy as the bankers will now have to revise upwards their targets for sales of products in terms of loans and such. One obvious target for them will be what they have often termed as the "unfair" advantage of the National Credit Schemes in offering interest rates that attract depositors over their products. And there is a rumour in the air that the government will correct the situation by bringing these rates down.
In the past, Finance Ministers have played around with these rates in order to encourage depositors to invest in the stock market. Unfortunately, while the investment has indeed gone in the motive seems to be short-term profits rather than long term confidence in the returns. The resultant volatility in the stock market has led to overnight ups and downs and crashes. Some analysts believe a major crash is inevitable, the consequences of which could be disastrous.
Part of the government's budget financing comes from access to private funds and its efforts have been successful in that it is sitting on some Tk 90 billion. What it intends to do with the money is the key question, given that there is interest to be paid out.
Of more interest will be the actions of the banking sector. Not only will they require even more "aggressive banking" but also "creative banking" beyond the barriers of the different new tools and products such as Mutual Funds that they are trying to introduce. The onus is theirs to break the vicious circle. (The writer is a former Head of Corporate & Regulatory Affairs of British American Tobacco Bangladesh, former CEO of Bangladesh Cricket Board and specialises in corporate affairs, communications and CSR. e-mail: mahmudrahman@gmail.com)
In spite of the very difficult circumstances of rate ceilings and a lack of safe borrowers, the banking sector returned exceptional profits last year. A leading banker had attributed the success to "aggressive banking" without really elaborating on what this was. Fair enough. He and his colleagues in the sector had done what was expected of them.
High liquidity from remittances and deposits were balanced out by lower deposit rates and the expectation that government borrowing would increase once the Annual Development Programme (ADP) swung in to full gear and the international recession came out of its slump. Another banker had been upbeat about this recovery towards the middle of last year.
Come March 2010 and the recovery in Europe and US is sluggish. The Government of Bangladesh has implemented only 30% of its ADP causing it to slash the target downward. In between exports and remittances have both taken dips that while yet to be alarming are red flags. The worst news for the banking sector is that the government has nearly halved its borrowing buoyed by the near trebling of its National Credit Scheme sales where the depositor the finds best rates of return under the given circumstances for their money.
This development sends strategic planning into somewhat of a tizzy as the bankers will now have to revise upwards their targets for sales of products in terms of loans and such. One obvious target for them will be what they have often termed as the "unfair" advantage of the National Credit Schemes in offering interest rates that attract depositors over their products. And there is a rumour in the air that the government will correct the situation by bringing these rates down.
In the past, Finance Ministers have played around with these rates in order to encourage depositors to invest in the stock market. Unfortunately, while the investment has indeed gone in the motive seems to be short-term profits rather than long term confidence in the returns. The resultant volatility in the stock market has led to overnight ups and downs and crashes. Some analysts believe a major crash is inevitable, the consequences of which could be disastrous.
Part of the government's budget financing comes from access to private funds and its efforts have been successful in that it is sitting on some Tk 90 billion. What it intends to do with the money is the key question, given that there is interest to be paid out.
Of more interest will be the actions of the banking sector. Not only will they require even more "aggressive banking" but also "creative banking" beyond the barriers of the different new tools and products such as Mutual Funds that they are trying to introduce. The onus is theirs to break the vicious circle. (The writer is a former Head of Corporate & Regulatory Affairs of British American Tobacco Bangladesh, former CEO of Bangladesh Cricket Board and specialises in corporate affairs, communications and CSR. e-mail: mahmudrahman@gmail.com)