Banks tread perilous path

Most private banks have ventured into risky business to bag excessive profits that inflated share prices and call-money rates. According to Bangladesh Bank (BB) statistics, the credit-deposit ratio in private banks was 89 percent last year, which was 73 percent in state-owned commercial banks (SCB) and 83 percent in foreign banks. Banks are allowed to lend up to 82 percent after maintaining a statutory liquidity requirement against deposits. If any bank wants to go for aggressive banking it can raise the ratio to 85 percent by adding capital alongside deposits, the central bank said. It was revealed that 20 out of 30 private banks lend up to 85 percent against deposits. Some banks lend more than 100 percent, which means they lend by borrowing from the callmoney market at higher interest rates. Lending growth of 30 out of 43 local and foreign commercial banks was much higher than their deposit growth.
Daily Star: 18.01.2011

Money supply to beat govt target

Money supply has gone up beyond the government target although the central bank at the start of the current fiscal year vowed to contain credit growth to fight rising inflation. In its half yearly monetary policy announced in July last year, Bangladesh Bank (BB) targeted to bring down the credit growth to 16 percent by June this year. But instead of coming down, the private sector credit growth that was 24.24 percent in June last year rose to 27.77 percent in November, according to BB statistics. A recent BB analysis on the private sector credit growth shows that the highest growth was in trade and consumer credit. Credit to the trade sector went up by 34 percent, while consumer credit rose 47 percent in September last year. Of the consumer credit, loans for purchasing flats grew by 64 percent, for consumer goods by 45 percent, and for credit cards 42 percent. However, credit in the industrial sector increased by 17 percent, while credit growth to finance working capital was 13 percent. To contain inflation, the central bank has already increased the commercial banks' cash reserve requirement (CRR). The rise in inflation, however, is not due to money supply. The main cause of the recent rise in inflation is an increase in food prices on the domestic and international markets. In the first five

months of the current fiscal year, import growth jumped 36 percent. The situation was opposite in the same period last year, as it went down 12 percent. Food grain import increased by 92 percent in the July-November period this fiscal year, compared to the same period a year before.

BB cautions about 'painful' crash in real estate sector

Credits expand beyond targets, finds diversion of funds to asset mkts Bangladesh Bank (BB) on 30.01.2011 cautioned all concerned of a "painful" crash in the country's overheated real estate sector and admitted that a large chunk of credit meant for industries and small and medium enterprises (SMEs) have been diverted to the capital market. It was particularly worried about forming of a bubble in the housing sector, which the BB said was not driven by credit and where the central bank's monetary and credit policies have limited impact. The central bank released the statement at a press conference at its head office. Its officials, however, took no questions on the asset price bubbles that the BB has warned of in the written statement. Real estate prices in the capital Dhaka have shot up by more than 300 times since the country's independence, prompting some experts to forecast an imminent bubble burst in the market. Despite its limited role in the property market, the BB last April asked the country's 40 plus commercial banks not to extend loans to land purchase in an attempt to rein in sky-rocketing prices. The BB said the capital market must be steadied following the January crash, driving home the message that its stability is important for sustaining the country's economy on a high growth path. The BB had earlier sought detailed information from commercial banks about any diversion of credit meant for real sectors to the stock market and the deadline for submission of such reports was extended twice. Later on, after the crash of the stock market this month, the BB has put on hold its directive to this effect. According to the BB's latest statistics, credit to the private sector grew 27.8 per cent, industrial term loan 38.3 per cent and SMEs 42.9 per cent year-on-year in November 2010. The BB rejected some analysts' observation that its mid-December hike in Cash Reserve Requirement (CRR) sparked the crash at the Dhaka and Chittagong Stock exchanges. The few banks with capital market asset holdings beyond permissible limits were allowed extended periods to scale down to permitted levels gradually, and had no reason to cause abrupt selling pressure, it added. The central bank also warned that it would sternly deal with "lapses and laxities" in banks' lending practices, eschewing forbearance

BB rules out increased CRR's impact on money market

The central bank has ruled out the impact of increased cash reserve requirement (CRR) on the money market, saying that it has injected more funds through repurchase agreement (Repo) auction than withdrawal. The commercial banks have deposited Tk 20.76 billion to the central bank to maintain the new CRR rules, which came into effect from December 15 last, a BB press statement said. The central bank provided liquidity support amounting to over Tk 60 billion to the banks through Repo auction and liquidity support, the BB data showed. On the other hand, the central bank has resumed offer of overdraft (OD) facilities to banks aiming to keep foreign exchange market stable. Under the move, the BB provided OD facilities worth US$200 million to the commercial banks in the last two weeks for settlement of their import payments

Banks hike rates on deposits

Lending rate remains unchanged

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The banks are offering interest rates up to 13 per cent in January, up 10.47 per cent on December, while the rate for savings accounts rose to 9.50 per cent from 9.0 per cent, according to the central bank statistics released 20.01.2011. But private banks agreed to cut interest rates on deposits to 12 per cent from the current 13 per cent. On April 19, 2009, the central bank asked commercial banks to keep lending rate at 13 per cent in five specific areas to help mitigate the impact of the global economic meltdown. The areas include agriculture, term loan to large and medium-scale industries, working capital to large and medium-scale industries, housing, and trade finance. The inter-bank call money rate shot up a record 190 per cent on December 19 last, indicating that some commercial banks were facing a big mismatch in their fund position. Term loans to large and medium-scale industries attract interest rates ranging between 11 per cent and 13 per cent while rates for small industries were fixed between 10 per cent and 18 per cent. Similarly, interest rates on housing loans range from 9.99 per cent to 13.00 per cent and on consumer credits are between 11.50 per cent and 19.50 per cent. Bank charge 10.25 to 13 per cent on working capital to large and medium scale industries and interests for small industries vary between 11.50 per cent and 17.00 per cent.

BB asks banks to reduce focus on capital market

Bangladesh Bank asked the commercial banks to better manage their liquidity by focusing on core banking areas like development activities, industry and trade, reducing their focus on unproductive sector like share market. The central bank governor in a meeting with chief executives of commercial banks observed that the banks would have to focus mainly on core banking as economic activities are expected to pick up this year. 'As the economic activities will pick up, opening of letters of credit and need for funds for productive sectors will increase. So the banks need to be prepared with adequate liquidity. The central bank earlier warned the banks to reduce exposure of lending in the capital market to 10 per cent of their total liability, as many of the banks invested additional amount in the speculative investment in the stock market. The commercial banks made hefty operating profits in 2010, thanks to investment in the capital market which soared by 82 per cent during the year. BB warned the banks to reduce their exposure in the capital market to an allowable limit of 10 per cent. The meeting decided that automated cheque clearing system with electronic fund transfer will be Fin. Exp: 10.01.2011 launched throughout the country from February 24,2011 through the automated clearing house of the Bangladesh Bank. Once launched, different corporate houses would be able to make payments of employees' salaries and allowances, refund warrants of IPOs, company dividends, remittances, utility bills and different government allowances (freedom fighters allowance, widow allowance and old age allowance) speedily through the electronic system. The meeting also decided to provide same day clearing facilities for high value cheques (Tk 5 lakh and above) to over 1,200 bank branches in Dhaka zone by January 31. It was also decided in the meeting that all banks in Sylhet zone would be brought under automated cheque clearing system by January 20, while in Chittagong zone the same will be done by February 3.

Banks Banks warned against offering additional interest

Bangladesh Bank warned of tough action against the banks who are offering additional interest to attract more deposits for offsetting their cash crunch. The central bank in a directive said banks are not allowed to offer interests on deposits and advances, which are higher than their already announced rates of interest. But, the directive said the central bank recently noticed that some banks were offering higher interest only to attract more deposits. It asked the respective banks to stop such practice or face punitive actions. Banking sources said that the banks were accumulating deposits after the central bank warned banks against over exposure of funds in unproductive sectors like capital market. Many of the banks have invested more than 10 per cent of their total liabilities in the capital market floating a central bank directive.
New Age: 04.01.11

BB refutes allegation on liquidity crunch in money market

Bangladesh Bank on 09.01.2011 refuted the allegation that the central bank's directive on increasing cash reserve requirement by banks caused liquidity shortage in the money market. The central bank in a statement said that although the Bangladesh Bank withdrew Tk 2,076 crore from the money market through the increased cash reserve requirement that came into effect on December 15, the central bank released Tk 6,000 crore to the banks and non-bank financial institutions including liquidity support to the primary dealers. 'The amount of liquidity support reached to Tk 7,000 crore on 09.01.2011. After the central bank raised CRR in December, banks and non-bank financial institutions scampered for cash and the inter-bank call money rate shot up to an unprecedented 190 per cent. The central bank said as the import growth was rising, BB continued its support to the authorised dealer banks by directly selling US dollars or in the form of over-draft from the clearing account.

BB asks banks to purchase shares

Will be lenient on banks' capital market investment The Bangladesh Bank asked the commercial banks to purchase shares and assured them that it would be soft on the banks which have invested more than their allowable limit. The central bank issued the directive at an emergency meeting with commercial bankers held to discuss the massive slide in the share market. They would be lenient to the banks which had provided more funds to their merchant banking wings than the allowable limit because of the current crisis in the capital market. They would also be lenient in asking the banks to provide information on the industrial loans which have been invested in the capital market. The central bank would consider whether more time for adjusting such loans could be given on a case-to-case basis. Banks were asked to not to sell the shares in their possession.