Business Desk :
The Bangladesh Bank is rowing back on the monetary policy it adopted to curb aggressive lending as it now wants to ease liquidity crisis in banks in the year of general elections.
Former governor Salehuddin Ahmed says the central bank decisions on relaxing cash reserve requirement or CRR along with cutting repo interest rate ‘following pressure from the bank owners’ run against the monetary policy it announced at the end of January.
South Asian Network on Economic Modelling or SANEM Executive Director Prof Selim Raihan has warned the government such decisions may aggravate the instability in the banking sector, report bdnews24.com.
Debashish Chakraborty, an executive director and spokesperson for the Bangladesh Bank, however, denies there was ‘pressure’ on them.
He, instead, claims the central bank made the decisions to help the government achieve the GDP growth target.
The changes come at a time when irregularities amounting to tens of millions of taka have thrown the Farmers Bank, launched only four years ago on political considerations, into deep trouble.
Many ask whether money being laundered abroad before the election is causing the liquidity crisis in the banks.
Finance Minister AMA Muhith and Bangladesh Bank Governor Fazle Kabir sat with the Bangladesh Association of Banks or BAB, the body of the owners and entrepreneurs of the sector, at a Dhaka Hotel on Sunday.
The way Muhith and Kabir decided to reduce CRR and repo rates in the meeting has raised a few eyebrows.
The members of BAB along with the families met Prime Minister Sheikh Hasina at a Ganabhaban event on Tuesday.
Hours before the event, the central bank issued a circular, cutting the CRR by 1 percentage point to 5.5 percent. The decision will go into force from Apr 15.
Cash reserve ratio or CRR, also called cash reserve requirement, is a minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank.
The repo interest rate determines the rate of interest a commercial bank has to pay on loan from the Bangladesh Bank.
The central bank has cut the rate from 6.75 percent to 6 percent.
The reverse repo interest rate, which determines the interest rate the central bank pays on loans from commercial banks, has remained unchanged at 4.75 percent.
The central bank controls liquidity and flow of investment with these rates called policy tools.
Cuts in the repo interest rate and CRR mean the Bangladesh Bank has eased the way for the banks to keep more cash.
Economists estimate only the drop in CRR will allow Tk 100 billion into the banks.
The central bank uses CRR to safeguard depositors’ money. The Awami League government raised the CRR from 6 percent to 6.5 percent after it won the 2014 elections.
Now, it has also decided to double its deposits in the private banks.
According to the rules, 75 percent of government institution assets are currently kept at state-run banks.
Managing directors and chairmen from private banks have long asked the government to make larger deposits at their institutions.
Muhith recently said the government would soon start keeping 50 percent of its assets in private banks.
The Bangladesh Bank is rowing back on the monetary policy it adopted to curb aggressive lending as it now wants to ease liquidity crisis in banks in the year of general elections.
Former governor Salehuddin Ahmed says the central bank decisions on relaxing cash reserve requirement or CRR along with cutting repo interest rate ‘following pressure from the bank owners’ run against the monetary policy it announced at the end of January.
South Asian Network on Economic Modelling or SANEM Executive Director Prof Selim Raihan has warned the government such decisions may aggravate the instability in the banking sector, report bdnews24.com.
Debashish Chakraborty, an executive director and spokesperson for the Bangladesh Bank, however, denies there was ‘pressure’ on them.
He, instead, claims the central bank made the decisions to help the government achieve the GDP growth target.
The changes come at a time when irregularities amounting to tens of millions of taka have thrown the Farmers Bank, launched only four years ago on political considerations, into deep trouble.
Many ask whether money being laundered abroad before the election is causing the liquidity crisis in the banks.
Finance Minister AMA Muhith and Bangladesh Bank Governor Fazle Kabir sat with the Bangladesh Association of Banks or BAB, the body of the owners and entrepreneurs of the sector, at a Dhaka Hotel on Sunday.
The way Muhith and Kabir decided to reduce CRR and repo rates in the meeting has raised a few eyebrows.
The members of BAB along with the families met Prime Minister Sheikh Hasina at a Ganabhaban event on Tuesday.
Hours before the event, the central bank issued a circular, cutting the CRR by 1 percentage point to 5.5 percent. The decision will go into force from Apr 15.
Cash reserve ratio or CRR, also called cash reserve requirement, is a minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank.
The repo interest rate determines the rate of interest a commercial bank has to pay on loan from the Bangladesh Bank.
The central bank has cut the rate from 6.75 percent to 6 percent.
The reverse repo interest rate, which determines the interest rate the central bank pays on loans from commercial banks, has remained unchanged at 4.75 percent.
The central bank controls liquidity and flow of investment with these rates called policy tools.
Cuts in the repo interest rate and CRR mean the Bangladesh Bank has eased the way for the banks to keep more cash.
Economists estimate only the drop in CRR will allow Tk 100 billion into the banks.
The central bank uses CRR to safeguard depositors’ money. The Awami League government raised the CRR from 6 percent to 6.5 percent after it won the 2014 elections.
Now, it has also decided to double its deposits in the private banks.
According to the rules, 75 percent of government institution assets are currently kept at state-run banks.
Managing directors and chairmen from private banks have long asked the government to make larger deposits at their institutions.
Muhith recently said the government would soon start keeping 50 percent of its assets in private banks.
