The central bank of Bangladesh has set June 30 as deadline for bringing down credit to deposit ratio (CDR) of the commercial banks to a reasonable level.
Under the directives, the conventional commercial banks will have to bring down their CDR to 85 while Sharia-based Islamic banks to 90 by June 30 next.
The instructions were given at an emergency meeting held between the chief executive officers of 24 commercial banks and senior deputy governor of the Bangladesh Bank (BB) Nazrul Huda at the central bank Sunday.
The deadline has been set as the CDR of 24 private commercial banks (PCBs) out of a total of 30 has gone above the safe limit.
Of them, CDR of 18 conventional banks ranges between 85 and 99 while that of six Islamic banks ranges between 90 and 101, the BB officials added.
They also said average CDR of all banks stood at 85.64 as on February 3 this year.
"We've taken these precautionary measures to ensure stability in the country's banking system," BB Executive Director SK Sur Chowdhury told the FE after the meeting, adding that the central bank will take punitive actions against the banks concerned if they failed to meet the deadline.
He also said the central bank will impose restrictions on their some major expansionary activities including issuance of licence for authorised dealer (AD) branch, generally known as foreign exchange branch, and approval for opening new branches.
Indirect interventions may also take place after the expiry of the deadline, the central bank executive added.
"The PCBs will have to bring down their CDR within the prescribed limit gradually by the deadline," a BB official said, adding that the central bank will monitor the performance of the banks in line with their plans, which the latter are supposed to submit within this month.
Besides, the banks have been asked to align their credit growth with deposit growth for minimising the mismatch between their assets and liabilities by June 30 this year.
Credit growth of all 47 scheduled banks reached 29 per cent as on February 3 while deposit growth stood at 22 per cent, according to the central bank statistics.
"The banks will have to align their credit and deposit growth within the timeframe without affecting credit flow to the priority sectors like food grains and petroleum products imports," another BB official said.
He also said the central bank wants the banks to keep their credit growth in line with the deposit growth following strictly the existing assets and liabilities management guidelines.
Most of the PCBs will discourage credit to 'unnecessary imports' aiming to brining down their CDR at the rational level with the stipulated timeframe.
"We'll follow defensive credit policy this year instead of aggressive one to comply with the central bank rules and regulations properly," an executive of a leading PCB told the FE without elaborating.
Executive Director of private think tank Policy Research Institute (PRI) Ahsan M Mansur expressed concern over the rising trend of CDR of the commercial banks saying that the BB needs to act firmly and immediately if it wants to contain domestic demand and exchange market pressures within limits consistent with macroeconomic stability.
"The advance to deposit ratio of the commercial banks always remained below 80 (since 2002) and this ratio crossing 85.6 is a matter of great concern," Mr. Ahsan Mansur told the FE.
After the collapse of the stock market, the liquidity generated from there is likely be diverted to trading and exchange market, he said.
"The surge in LC opening, while a part is induced by export demand, is a manifestation of this emerging problem," the PRI economist said, adding that already more than $15 billion worth of LCs have been settled and a further $19.3 billion worth of LCs await settlement."
"The size of the outstanding LCs is a matter of concern since these LCs are going to be settled soon (in the next 3-4 months), further accentuating pressures on the exchange market," he noted.
He also said at this pace, import payments may cross $35 billion in the fiscal 2011, contributing to an unsustainable trade account deficit of $13 billion, even if exports reach $22 billion mark (40 per cent increase).
"Can Bangladesh finance a trade deficit of around $13 billion in an environment of stagnant remittance flow ($11 billion) and a deteriorating services account deficit? I do not know how we can contain the deteriorating demand pressures without significantly tightening our monetary policy stance and abandoning the cap on lending rates. It may sound like an alarmist, but I have a feeling that if we do not act now, a balance of payments crisis may become unavoidable," the PRI executive added.
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