• Tuesday, Sep 17, 2019
  • Last Update : 03:15 pm

'Single digit lending rate may be difficult to achieve'

  • Published at 11:14 pm August 3rd, 2019
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The Bangladesh Bank building at Motijheel Mehedi Hasan/ Dhaka Tribune

In a press statement signed by its CEO Ferdaus Ara Begum, it said interest rates cannot be dictated, but having a meaningful strategy for bringing down the liquidity crisis and lowering the interest rate through different tools could be helpful and some guideline should be in the MPS

Reacting to Bangladesh Bank's monetary policy statement (MPS) for 2019FY, Business Initiative Leading Development (BUILD) said as a result single digit lending rate may be difficult to achieve, but measures should be adopted to facilitate access to finance for businesses including SMEs.

In a press statement signed by its CEO Ferdaus Ara Begum, it said interest rates cannot be dictated, but having a meaningful strategy for bringing down the liquidity crisis and lowering the interest rate through different tools could be helpful and some guideline should be in the MPS.

BUILD deemed the MPS "an expansionary monetary policy with 12.5% growth of Broad Money (M2) which is 0.5% higher than previous MPS. The decision of yearly MPS  may not be  rational as MPS is declared on the basis of the pulses of current situation of indicators which fluctuate frequently."

It also said the inflation is apparently at a tolerable level (5.47%) which was 5.54% in December 2019, but still higher than the emerging economies (4.6%).

The present level of inflation is caused by the indigenous market forces disruption, the statement said, the government's decision to increase the price of utilities (gas and electricity) around 25% may heat towards inflation increase.

"Another factor is implementation of VAT & SD Act 2012 will increase the product price as a result of non-adjustable VAT at 5% at trading level irrespective of any goods supplied inside the economy. There is no such direction to given in the recent MPSs for diagnosing the market disruption points for this major changes made in budget."

BUILD also said private sector credit needs to be encouraged in line with the government’s policy.

"Private sector credit is expected to grow slower than that of public sector, attributed to the larger size of the former. The public sector credit growth is also due to the mega projects, resulting in crowding out of private credit. However, the government has focused on more foreign aid to avoid crowding out domestic private sector credit. MPS could have some direction in having more private sector investment towards employment creation and GDP contribution."

Reforms in banking sector

Stronger oversight over banks’ financial health and due diligence should be ensured so that there can be proactive measures against capital shortfall or irregularities, the statement observed.

"In addressing the issue of non-performing loans, Bangladesh Bank has spoken in favor of bankruptcy proceedings to deter non-performance of loans. In April 2019, Bangladesh Bank revised its loan reclassification policy, extending the timeline for classifications of loans as substandard, doubtful, and bad each by three months. Strict due diligence policies would need to be highlighted."

"In the MPS, BB has observed that the spread between deposit and lending rates hasn’t reduced much, since there have not been much efficiency gains. Thus, despite significant growth in the number of private commercial banks in recent years, competition is not driving transformative change in efficiency. The scope of online banking needs to be expanded, there should be some direction in the aspect."