Some thoughts on Bangladesh Bank’s next monetary policy statement
FROM PAGE b4
WHAT IS THE OUTLOOK FOR RESERVE BUILD UP AND WHAT IS ITS IMPLICATIONS FOR LIQUIDITY MANAGEMENT AND DOMESTIC INFLATION?
In my view, Bangladesh has an opportunity to build up reserves, if possible, up to $0.5-$1.0 billion per month for the next six months.
This process of accumulation will inject an additional Tk 30,000-50,000 crore liquidity to the economy.
That would be a large amount and together with the planned refinancing facility will go a long way towards alleviating the liquidity problem and deposit growth of the banking system.
My personal feeling is that inflows of remittance will nose dive after a few months once the transfer of savings by the returning workers is completed.
Many workers in Saudi Arabia and other Gulf countries are without jobs and are sending their savings.
Nobody has gone outside Bangladesh as workers after February and the outlook for the coming months is quite grim.
So we have to protect our reserves for the days when domestic demand will pick up and imports will get back to its normal growth path.
Remittances may not be available in abundant quantities at that time.
I do not believe that liquidity expansion through reserve build-up will fuel inflation under current circumstances.
There will be no need for mopping up operations through the issuance of BB bills.
WHAT WOULD BE THE STRATEGY FOR GROWING OUT OF THE HUGE UNDERLYING BUILD-UP OF DEFAULT LOANS?
The default loan situation of banks will certainly get much worse once proper reporting is resumed.
At present, banks are capitalising the unpaid interest obligations, thereby artificially fuelling domestic credit expansion to the private sector in the reported data.
The banks’ default loans are certainly going to increase by at least Tk 60,000 crore or more by the end of the year.
Banks should be heavily provisioning against such an outcome and the BB should encourage and mandate the banks in going toward that approach.
The BB should not ease its macro-prudential conditions like credit reserve ratio, loans-deposit ratio and so on any further.
The central bank should prepare a contingency plan for merger, acquisition and liquidation of weak banks. It should have a strategy for dealing with massive delinquency of banks and non-bank financial institutions.
I do not support the public sector asset management company in a country like Bangladesh with serious governance problems.
This will simply allow private and public sector banks and financial institutions to dump their bad assets to this institution at inflated recoverable asset values and the government and citizens will be carrying the liabilities of the bad assets forever.
Instead, the BB should urge the finance ministry to create a regulatory framework for establishing private sector asset management companies and the financial institutions should deal with the private asset management companies without any risk/liability to the public sector.
WHAT NEEDS TO BE DONE BY THE REGULATOR REGARDING SME LENDING?
SME sector needs special attention in every country. In Bangladesh, we made SME lending virtually impossible due to the 9 per cent cap on the lending rate, with a de facto 6 per cent cost of fund.
The 3 per cent spread is not at all attractive enough for banks to lend to the SME sector, give the risks associated with such lending and the high cost of administration in managing such portfolios.
The BB has finally agreed to reduce the partial risk guarantee for SME loans at a fee of 0.5 per cent (from the originally proposed 2 per cent). This is welcome.
I believe, in this moment of crisis, more should be done to promote SME lending.
Either the BB can allow the lending cap for SMEs to be increased to 12-13 per cent or provide subsidy to the financial institutions for SME sector lending in the amount of 3-4 per cent per annum. The subsidy could come from the finance ministry or the BB itself.
Similar issues exist with regards to cottage and micro enterprise (CME) lending through microcredit institutions.
The BB should look into the problems seriously if it wants the credit to be disbursed to the CME sector expeditiously.
STIMULUS PACKAGE AND ITS CLOSE MONITORING
I welcome the initiative by the BB to put pressure on the banks to disburse most of the stimulus package related loans to affected companies within August.
While this timeframe is indicative, the BB should put in place a monitoring cell with representatives from the finance ministry, banks and the relevant sectors.
The committee should meet with sector representatives and banks every week to monitor the flow of loans based on daily reporting by banks in prescribed formats.
A progress report should be prepared by the monitoring cell and disseminate that to the stakeholders along with media every two weeks.
The progress report should review the performance of each bank by sector (SME, agriculture, large industries etc.) and also identify the impediments, if any, based on stakeholders’ consultations or inputs.
The monitoring cell should also help identify whether the allocated funds are adequate for the demands of the sectors and make recommendations in this regard.
The sectoral allocations announced should be seen as starting points and the endpoints should be determined based on sectoral demands and the state of recovery of the economy and the sector.
AUTOMATION OF BB AND THE BANKING SECTOR
Finally, I would request the BB to take the opportunity of the pandemic to move fast towards paperless banking transactions and operations.
All submissions to the BB should be mandated to be done electronically and the authorities should prepare the BB infrastructure and staff accordingly.
There is no reason for banks to submit bundles of papers to the BB regularly.
The BB should set a target for making all banking-related transactions in the paperless form within three years and force all banks and the central bank staff to undertake necessary preparations in that regard.
The writer is the executive director of the Policy Research Institute