Published in The Financial Express on Saturday, 1 August 2015.
Jasim Uddin Haroon
Some noted economists find the latest monetary policy wanting in some major aspects like lack of direction for improving the quality of governance in the banking system and lending-rate cuts.
They aired the fear that unpunished bad borrowers would continue to drive out good entrepreneurial ones and, consequently, high rates of interest would stand in the way of increasing investment.
However, in their critical appreciation of the half-yearly monetary policy statement (MPS) unveiled by the central bank Thursday, they said there are some positive aspects in it as well.
The monetary policy for July-December period of the current fiscal was made public by the Bangladesh Bank (BB) with a set of goals that its authors hope would strike a balance and spur economic growth as desired.
The critics said there are no specific guidelines in the MPS as to how to ensure good governance in the banking system. They argued this is very much relevant as higher lending rate prevails on the money market following the rise in the volume of bad loans.
Lower rates of interest is necessary for boosting investment that has remained “almost stagnant” for long, they noted.
They pointed out that the central bank has a strong role in devising guidelines for promoting the genuine borrowers.
But bad borrowers are now kicking out the real and promising entrepreneurs, thus creating stagnation in the field of investment.
Dr Zahid Hussain, lead economist at the Dhaka office of the World Bank, said governance issue has not got prominence in the policy although the need for it is “very much felt now”.
He argued the rates of interest would not fall until the dud loan drops.
“Bad loan will fall only after preventative and punitive measures to be taken by the central bank,” the World Bank lead economist said, in an implicit reference to some loan scams of recent times.
“We’re seeing the preventive measures are there but no punitive ones against the defaulters,” Dr Hussain said.
The economist said the MPS has given some little spaces on governance without any specific planning how to handle the rise in what is termed mal-governance in the banking sector.
According to the MPS the central bank is monitoring the recent build-up in nonperforming loans with concern and care.
It also said Bangladesh Bank has already taken some corrective measures to clamp down on classified loans.
“Bangladesh Bank will not be lenient in this regard,” it said.
The MPS also says the central bank has taken various steps to improve supervision to help reduce financial frauds. The measures include the introduction of digital technology.
Dr Ahsan H Mansur, executive director at the Policy Research Institute of Bangladesh (PRI), also noted that monetary policy has a role in facilitating investment through reduction of rates of interest.
He said some of the targets of the last monetary policy failed as investment did not pick up.
It is believed that interest rate is not going to come down as the cost of operation of the banks would continue to remain high due to bad loans.
He said the inflation target should be more ambitious– below 6.0 per cent. The monetary policy targeted 6.2 per cent inflation in the fiscal year 2015-16.
The inflation rate prevailing now is almost near the target.
Dr Mansur, however, finds in the policy some positive aspects like the money-supply programming as these are in line with the macroeconomic management and the seventh five-year plan.
He said keeping policy rate unchanged was “justifiable” as the banks have adequate idle money. “If the policy rate eases, it will result in further idle money and that may lead to investment in unproductive sectors,” he said to substantiate his view that conforms to this point of the policy stance.
Dr Khandker Moazzem, additional director at the Centre for Policy Dialogue (CPD), country’s oldest private think tank, said the MPS has warned against the defaulters but it needs bold decisions to implement.
He however expects that the central bank will act accordingly and give directive on the matter to the commercial banks, state-owned or private.
The volume of non-performing loans (NPL) in the country’s banking system increased further in the first quarter (Q1) of the current calendar year.
The amount of NPL rose by nearly 9.0 per cent to Tk 546.58 billion during the January-March period from Tk 501.56 billion in the preceding quarter. It was Tk 572.91 billion in the Q3 of 2014.
However, the share of classified loans in the total outstanding of the country’s banking system reached the double-digit mark again in the Q1) of 2015 despite close monitoring by the central bank.
The classified loans cover substandard, doubtful and bad/loss of total outstanding credits which stood at Tk 5222.66 billion as on March 31 last, according to the central bank statistics.
Mr Moazzem further observed that the local currency, Taka, continued to remain strong for long, leading to loss of competitiveness on the part of the exporters.
“In my view the exchange rate should have depreciated to boost export,” Mr Moazzem added.