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Budget 2012-13: Need for agriculture sensitivity

Habibullah Bahar
A timely and thought provoking article titled "Are the new banks economically justifiable?" by Mr. Mahfuz Kabir of BUSS, published in The Daily Star on April 13, has attracted the attention of many readers. The write-up is based on economic theory, but some realities have been ignored in the paper, a few of which are given below:
• The author put emphasis on the market determined interest rate, particularly the lending rate, but did not say anything about the deposit rate. I think this comes first because banks first collect deposits and then make loans and advances. Bank deposits are related, among others, to inflation rate. If inflation rate is lower, deposit rate will also be lower and consequently lending rate will also be lower. So, the main concern of the authorities should be containing inflation (as the Bangladesh Bank has rightly mentioned in the Monetary Policy Statement, January 2012), which at present is running higher than the projected rate;
• The writer said that our banks are overly urban and peri-urban centric, which is not correct. In Bangladesh, in December 2011, there were 7,961 bank branches, out of which 4,551 branches (57.17%) were in the rural areas. The amount of deposits in the rural areas stood at Tk.59,725.17 crore (13.42% of total deposits) in December 2011. On the other hand, rural advances amounted to Tk.27,106.86 crore (7.73% of total advances). Credit-deposit ratio stood at 0.84 and 0.45 in urban and rural areas respectively in December 2011. This means that the existing banks are collecting more deposits (13.42%) from the rural areas and injecting less in the form of advances (7.73%) in those areas. This indicates diversion of financial resources from rural to urban areas through the banks, and the inequality in income between the urban and the rural areas is widening;
The writer has cited the rule for opening new banks on 1:1 ratio in rural and urban areas, which he expects will increase "financial deepening." This is perhaps a correct proposition. But, if the new bank branches divert the financial resources (deposits) from rural to the urban areas like the existing banks, will it be good for the rural economy? The question, therefore, is not about opening more and more branches in the rural areas but about the deployment of resources in these areas. If the banks can retain the funds in the rural areas then it will activate rural economy, and increase income, employment and demand there. For this, the authorities can think about calculating separate Credit-Deposit Ratio (CDR) for the rural branches and give directions to the banks accordingly. Side by side, new prospective areas of investment, like SMEs and off-farm activities, should be explored by the banks in line with Bangladesh Bank's directives;
• The writer did not say anything about the head offices of the prospective banks. I think it will be good if the government/central bank directs the sponsors of the new banks to establish their head offices outside Dhaka city. Only giving some benefits (we do not know in what form) to the sponsors for opening head office outside Dhaka will not help in achieving the objectives. In the age of internet and with the presence of digital communication system, it has become easier to communicate with anybody, anytime, anywhere. If head offices are located outside Dhaka, it will lessen pressure on housing, transportation and other utilities in the capital city. It will also be in line with the decentralisation policy of the government.
The writer is Agrani Bank Chair Professor, BIBM, Mirpur.
****Agricultural performance hinges crucially on adequate and timely supply of inputs at resonable price. In the last few years, the fertiliser crisis was mitigated but the problem of quality seeds and irrigation still remains.*****