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IMF alarmed at banks' credit growth leap

Rejaul Karim Byron
The International Monetary Fund (IMF) has expressed serious concern as credit by the private commercial banks went up by 38 percent in the first three months of the current fiscal year, although it recommends keeping the credit growth at 18 percent by June next year.
During the July-September period, private sector credit growth was 27 percent and the IMF is also concerned about the credit quality.
The IMF in its draft report submitted to the government last week suggested that Bangladesh Bank bring down the private sector credit
growth to 18 percent by June 2009.
"There are serious concerns about credit quality, especially among the private banks, some of which have been expanding their loan portfolio at annual rates in excess of 50 percent," the IMF report says.
A high official of BB said they are also investigating how much loan has increased in which sector and whether their quality wasproper.
According to BB primary observations, the loan went in construction, trade finance and housing sectors.
As per tire central bank quarterly estimation, the banks provided Tk 1,709 crore
credit in July-September Of this credit. 25 percent is trade finance, 21 percent industrial finance and 17 percent transport and communications.
"In context of slowing external demand, recent high rates of credit growth could quickly translate into deteriorating asset quality," the IMF warns.
Former deputy governor of the central bank and Chairman of Bangladesh Krishi Bank Khondker Ibrahim Khaled said, "The private banks give loans in more proportional way. As a result, the loans distributed through them are unlikely to be bad."
According to BB latest statistics, except for one or two problem banks the default loan in most of the private banks ranges between one to six percent.
Ibrahim said in recent times the import price has substantially increased in the world market resulting in credit growth.
The IMF report also says the high credit growth increases the probability of an increase in inflationary pressures.
It goes on to say that an increase in the rate in midSeptember was a welcome signal that BB is prepared to use monetary policy to address inflationary pressures.
"Greater flexibility in the interest rates on government securities, in line with market conditions, will likely to be needed to support Bangladesh Bank's objective to reduce private credit growth to 18 percent by June 2009," the IMF adds.
The former BB deputy governor said if the central bank takes the contractionary measure it would be a wrong policy.
He said, "We see that the public sector is shrinking, government expenditure is decreasing. In such situation if the private sector is squeezed
production will come down. In context of present global scenario, economy may face a depression."
In its suggestion on other areas the IMF says. "Sustained implementation of structural reforms will be important in the coming months to help safeguard the macroeconomic framework during the political transition and beyond.
"It will be important that the budget for fiscal year 2010 be consistent with the government's existing macroeconomic framework which is geared toward sustaining growth and poverty reduction with low inflation, and envisaged a fiscal deficit of 4 percent of GDP with domc^tj^ financing limited to no more than 2 percent of GDP."
In particular, it is imperative that strong revenue mobilisation efforts continue as higher revenue is a key pillar of the government's mediumterm macroeconomic framework, the IMF report adds.