This decision also raises the question of the consistency of monetary policy decisions. Just two months ago, the Bangladesh Bank announced reduction of ADR, allowing the banks upto December 2018 to comply with the tighter ADR of 83.5 percent from the prevailing 85 percent. The reduction of CRR is a measure in the opposite direction.
Last but not the least, is it going to fix the underlying causes of liquidity shortfall that some banks are facing? The media reports said that private commercial banks have been facing liquidity crisis in the past few months due to withdrawal of funds by a number of depositors, including government agencies.
Most analysts agree that the underlying cause is deficit in corporate governance in these banks, particularly in the areas of loan risk management and collection of non-performing loans. Banks who have done badly in these areas are the ones having the most difficulty in complying with the CRR. The CRR reduction will help them avoid the penalties for noncompliance, but it does little to incentivise improvements in corporate governance. Several bankers also admitted that reducing the lending rate to a single digit within a month was unrealistic.
And this is the key to the problem — the Finance Ministry is incentivising bad governance by overlooking their misdeeds of the past. The sheer numbers of bad loans which have plagued the sector is responsible for their current liquidity crisis — but instead of finding ways to correct it the Ministry is succumbing to the pressure created by the owners to lower the CRR.
This is not a sound monetary policy — at best it represents a manipulation of the money supply of an entire nation to suit the whims of a few bank owners who have no one but themselves to blame for the acute liquidity crisis which they are in. Why the entire nation to be held hostage to pay ransom to a few bankers who can’t even get their houses in order?
Currently, most of the private commercial banks, which have crossed the loan-deposit ratio (LDR) limit, are chasing after deposits to bring down the ratio within 85 per cent, as they cannot recover loans overnight. An 85 percent LDR limit means a bank can give a loan of Tk 85 against a deposit of Tk 100. Country’s out of 57 banks, the loan-deposit ratio of 38 banks is lower than 83 per cent already. To adjust to the new ceiling, banks will have to increase the total deposit by Tk 11,000 crore.
We have heard of locking the barn after the horses have been stolen, but this situation is akin to bringing in more horses to be stolen while keeping the barn door open. It will do nothing to help the economy but will create a situation where funds will be ploughed into the stock market to create further speculation driven instability while bank deposit rates plummet — and this is already happening. It can’t be good for the economy.
The government’s initiative to inject money into the banking system by reducing CRR and allowing state-owned agencies to deposit money into commercial banks is nothing but a desperate move to save the bad banks. It’s a sign of bad governance too.
We are not sure if the Governor of Bangladesh Bank knows how to act independently to save the banking system. It is sad to see cravenly docile people are holding important public positions.
