BB should abandon uniform repo rate, adopt case by case policy

World Bank (WB) former lead economist Zahid Hussain suggests a revision in repo rates by Bangladesh Bank (BB), discarding the traditional uniform rate and adopting case by case approach to maximize resource utilization.

If the central bank’s repo policy is changed to promote good banking practices, it will eventually create access for banks to sufficient funds to ensure credit flow to private sector, he says, adding that the new monetary policy should incorporate these issues. 

He stresses that more access to credit for private sector is the prerequisite for achieving 8.2% gross domestic product (GDP) growth target set by the government. 

The central bank should avoid uniform repo rate for banks to address liquidity shortfall and should rather adopt 'case by case' policy, said Zahid Hussain while talking to Dhaka Tribune over expectation of Monetary Policy Statement (MPS) the central bank is going to announce today for July-December 2019 period.

Governor Fazle Kabir will announce the MPS, said a BB press statement.

Zahid Hussain says sufficient liquidity is needed to finance private sector investment affecting GDP growth. As additional measure, the economist also suggests, the local foreign exchange market should be kept free from interference if the central bank wants to address liquidity crisis.

Repo is widely known as repurchase agreement by which a commercial bank borrows from the central bank. Thus, the interest rate payment against such borrowing is called repo rate, which is a key instrument of the central bank to manage liquidity status of banking sector.

Zahid Hussain tells Dhaka Tribune that given the current circumstances in the country's banking sector there is no alternative to creating more space for banks to have loanable funds for private investment, which is crucial for meeting the projected 8.2% GDP growth target.  

Taking into consideration that the private sector got five-year low credit growth of 11.29 percent last fiscal against the target of 16.5 percent, Zahid Hussain says: "This 11.29% credit rise will not support desired GDP growth. The private sector must get higher credit. Now the question is wherefrom the money would come?"

"Against this backdrop, the central bank has to review its repo policy by avoiding uniform rate for banks and adopt 'case by case' policy, by which banks will get separate rates to address respective liquidity shortfall and meeting clients' demand," he says.   

"In this policy, good banks having well maintained balance sheets and pragmatic plans to reduce non-performing loans (NPL) may be incentivized by providing liquidity support at lower repo rate. Unconditional lower repo rate for all the banks may eat up liquidity strength. This facility will be for the banks perform good," he argues.       

He says if a weak bank gets the same repo rate for borrowing from central bank, the money may go waste again. 

He adds the central bank has to stop interfering into the forex (foreign exchange) market.  

"Sale of greenbacks added to the ongoing liquidity crunch at banks. So, BB must stop selling greenbacks," he states.

Zahid Hussain says only productive pursuant of private credit will be supportive to GDP growth. He has also suggested the central bank deploy right mechanism to monitor the private sector's credit. 

"Higher credit to private sector will not benefit GDP growth if the money goes to housing, share market and other non-productive purposes," he maintains. 

The country's banking sector is passing through a persistent high NPL rate, liquidity crunch, fresh incidents of loan scams, capital flight, high government borrowing and declining deposit growth.

Earlier, talking to Dhaka Tribune, chairman of Association of Bankers, Bangladesh Syed Mahbubur Rahman said the monetary authority must keep adequate space in monetary program for banks for 'safe exit' from the harsh realities.    

He says implementing single digit lending rate by banks will be challenging as liquidity crunch continues. 

The private sector saw a credit growth of 16.94% in 2017-18, 15.66% in 2016-17 and 16.78% in 2015-16 fiscal years.

The banking sector's NPL stood at Tk. 1,10,870 crore in March, 2019.

The government's borrowing more than doubled at Tk26,446 crore as of June 30 last from Tk11,731 crore in the same period of the previous fiscal, according to BB data. The actual borrowing from banks was, however, lower than the target of Tk30,900 crore last fiscal.  

For the current fiscal, the borrowing target from banks has been set at Tk47,364 crore.