Bangladesh Bank struck a cautionary tone Monday when announcing its central monetary policy statement (MPS) for the second half of the current fiscal year 2017-18 (FY18).
The statement unveiled by Bangladesh Bank Governor Fazle Kabir reportedly includes directives to tighten credit supply and curb excessive lending.
The new policy has set the private sector credit growth target at 16.8% to gain 7.4% GDP growth with a 5.5% inflation rate equivalent to the rate set by the government.
However, the target is significantly lower than the growth rate achieved at the end of December 2017, which was 18.13% against the expected 16.2%.
Also Read - New monetary policy to be contractionary, ‘growth-friendly’
Although the central bank was supposed to give a new directive to private banks to bring down their Advance/Deposit Ratios (ADR) through the MPS, the banks received a fresh warning to follow the existing ADR instead.
Kabir said the new ADR will be effective from July.
“The new ADR of the banks will be lowered in a logical way, while the banks will have until June to maintain their existing ratios,” he said.
“We will come up with the order [for the new ADR] through a circular soon.”
During the briefing, the governor warned banks that stern action will be taken against those who are involved with excessive lending.
“To rein in these activities, the implementation of the Bank Company Act will be ensured,” he said.
According to the MPS, the central bank will take macro-prudential steps to curb imprudent unproductive lending, including intensive
surveillance on adherence to prescribed Asset-Liability Management (ALM) and Forex Risk Management guidelines.
The policy also encourages banks to avoid unduly high medium- or long-term investment financing exposures to corporate borrowers instead of corporate bond issuance in the capital markets through banks.
Also Read - Contractionary monetary policy on the cards
‘MPS is employment-focused’
Fazle Kabir said the MPS is focused on employment growth and stability.
“The employment generation has been given the top priority [in the MPS],” he said.
When asked whether reducing credit growth of private sector would hamper the employment growth, the governor said he could not see any problem in the employment growth as the MPS is focused on the SME sector where 20% of the credit would be disbursed.
“Even though the government is keen on giving licence to more new banks, the decision would be finalized after strict evaluation by the central bank’s board,” he said.
On the merger issue of the banks, Fazle Kabir said the government and the central bank have nothing to do in this regard as it is completely up to the banks who want to be merged.