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BB warns state banks on soaring credit

Four banks borrowed Tk 33,650cr in 10 days from call money market

Rejaul Karim Byron
The central bank has warned four state-owned commercial banks as their credit growth far outpaced deposit growth in signs of risky banking.
Bangladesh Bank sent separate letters to the chairmen of Sonali, Janata, Agrani and Rupali banks on Tuesday.
The four banks borrowed a total of Tk 33,650 crore from the call money market from September 6 to September 19, which the central bank mentioned in the letter as a reason behind a liquidity crunch in the inter-bank money market.
“The tendency to expand loans depending on borrowing is risky," the letter reads.
However, officials of the state banks said their lending marked a rise due to financing some big public sector projects.
They also said the deposit rate of
the banks is low, and as the private banks offer higher interest rates, many government institutions withdrew their deposits from the state banks and kept the amounts in the private banks.
The BB letter said, due to the inequitable tendency of increasing loan and advances, there is risk of a further rise in the risk weighted asset.
It would result in arising of necessity for maintaining additional capital, which may in future cause the banks to face capital deficit, the letter added.
The central bank this month reviewed information on how much the banks borrowed from the call money market in 10 days.
Against this backdrop, the central bank has asked the banks to be more careful in managing their liquidity.
Data showed Sonali Bank borrowed on an average Tk 486 crore every day from the call money market during September 6-19, while
Janata Bank Tk 1,246 crore, Agrani BankTk 1,177 crore and Rupali Bank Tk456 crore.
The BB letter also said, compared to December 30, 2010, on September 8, 2011 loan in Sonali Bank increased by 8
percentage points against deposit.
In Janata Bank the rise was 3 percentage points, in Agrani 10 percentage points and in Rupali 7 percentagepoints.
The BB said the state banks'
default loan went up and cash loan realisation marked a fall at end-June last year.
In this context, the central bank has urged the banks to take stringent steps to overcome the mismatch quickly.
The BB has asked the banks to formulate an action plan and inform the central bank of the steps they have taken.
Sonali Bank Chairman Quazi Baharul Islam told The Daily Star that they had to open a number of big letters of credit (LC) in the public sector in recent times which gave a rise to the amount of their credit.
They also had to take a soft stance for food import, leading to a hike in their lending.
On the other hand, Islam said, after last June many government institutions withdrew deposit from the bank as the interest rate it offered was comparatively low. The private banks have been offering higher
interest rates than the state banks.
However, he said they have already instructed the Sonali Bank management to increase the interest rate on deposit.
The move will improve the situation further in the next several months, Islam said.
Islam also said: "Before June there was nothing wrong in our liquidity management. But credit marked a rise after June."
He said he had noticed this much before, and asked the management to take effective steps.
Janata Bank Managing Director SM Aminur Rahman said the bank gave Tk 800 crore loans to Bangladesh Petroleum Corporation and Tk 300 crore to Bangladesh Agriculture Development Corporation.
Alongside the public sector, Rahman said, in the private sector they provided loans to priority areas such as power and food that shot up their amount of loans.