The banks in Bangladesh have been facing a liquidity crisis and as a result, the rate of interest is increasing fast. The authorities have made two decisions regarding the matter in an attempt to control the situation. Economists are hoping these decisions will help revive the banking sector.
The first decision is, 50% of government organizations funds will be kept in private banks. The second, the Cash Reserve Ratio (CRR) in private banks will be lessened by 1%.
Banks will be getting a large amount of extra money when these decisions are implemented. The economists said this extra money will have to be reinvested through the entrepreneurs in order to see a bigger change in the sector.
Former governor of Bangladesh Bank Dr Atiur Rahman said: “The banking sector as a whole would benefit greatly from these decisions. The money the banks will get from the 1% decrease of CRR and from the government funds being kept in private banks needs to be invested well through entrepreneurs. This will be good for the country’s economy too. ”
Bangladesh Bank former executive director M Mahfuzur Rahman said: “Like the government banks, the government has given license to private banks as well. There should be no problems with the government organizations keeping 100% of their money in the private banks if they want. There should be no limits.”
Regarding the CRR, he said: “In times of crisis, the 1% decrease of CRR will help the banking sector improve. However, I think the manner in which the CRR was decreased is not right.”
Governor of Bangladesh Bank called for a meeting on Sunday at a hotel in Dhaka. According to decisions made through a tripartite meeting, the government organizations will have to keep 50% of their funds in private banks. Aside from this, the CRR was decreased by 1%. Private banks will get around Tk10,000 crore due to the decrease of CRR.
Finance Minister Abul Muhith, Finance Secretary Mohammad Muslim Chowdhury, Secretary of the Financial Institution Division Md Yunus Rahman , Bangladesh Bank Deputy Governor SM Moniruzzaman, Adviser SK Sur Chowdhury, and the top officials of Bangladesh Association of Banks (BAB) were present in the tripartite meeting.
After the meeting, the Finance Minister told the media about the two decisions made. The Finance Minister’s announcement has made the stock market hopeful as well. This is affecting the price of the shares. The upturn in the banking sector has greatly contributed to increasing the price of shares on Sunday and Monday.
BAB President and Exim Bank Chairman Nazrul Islam Mazumder said: “The decision made by the Finance Minister and Bangladesh Bank Governor will swiftly improve the state of the banking sector. The liquidity crisis will go away and the rate of interest will come down.
“The CRR money is in fact the private banks’ money. Bangladesh Bank kept this money to themselves for 10 years with no visible results. The CRR money has not contributed to bringing down the inflation rate either.”
Previously, the government organizations kept 75% of their funds in state-owned banks. They could keep the rest 25% in private banks. Now they can keep 50% of their funds in privately owned banks.
Regarding the decrease of the CRR, the Finance Minister said: “The matter will be reviewed next June. We will observe the effect of these changes till then. Salman F Rahman has advised us to conduct a review in June. I approve of his suggestion. If the decisions are having a positive effect, that will beneficial for the banking sector. If not, we will take other measures.”
Inflation occurs when there is more money in the market; this is the general law of economics. However, Muhith has given assurance that this will not be the case this time.
The Finance Minister said the decrease of CRR will not affect inflation in any way. Nazrul Islam Majumdar agreed to this. He said: “The money that the private banks will get from the decrease of CRR will not make inflation go up.”
More steps taken to bring down interest rate
It was decided in the meeting that the coordination time for the Advance Deposit Ratio (ADR) of the banks will be increased as well. The new limit is till March, 2019. According to the current law, the limit was till December this year.
Apart from this, the policy system of central bank has increased the duration of repurchase agreement (repo) in order to control the skyrocketing interest rates. According to the current law, if banks borrow money from the central bank, they can keep the money for seven days at highest. There have been discussions about extending the duration to 28 days. The decision has been made to bring down the repo rate of interest to 6% instead of 6.75% as well.
Due to aggressive withdrawals during the polls year, a deposit crisis is created in the banking sector. The Farmer’s Bank incident added to the crisis and worsened the situation. The rate of interest kept climbing uncontrollably.
At this point, all the banks put high rate of interest on deposits. Businessmen had to take out loans with extremely high interest rates. The prime minister has urged the rate of interest to be brought down to a single digit. In a recent Awami League joint-meeting, she urged the banks to not only think about making profit but act for the sake of the country’s development and bring down the rate of interest.
This article was first published on banglatribune.com