Bangladesh Bank yesterday announced its new monetary policy for January-June with a target to tighten money supply and curb excessive lending, which is likely to raise interest rates and hurt businesses and consumers.

The new policy has set private sector credit growth target at 16.8 percent against 18.13 percent growth in the first half of the fiscal year 2017-18. In July last year, the central bank set the private sector credit growth target of 16.3 percent, but the growth was way over target on the back of rising imports and development activities. 

The continued negative trend of government's bank borrowing has prompted the central bank to raise the private sector credit growth target.

The Bangladesh Bank will also slash loan-deposit ratio by two percentage points to 83 percent, meaning that the bank's ability to lend will be further tightened.

An instruction would be issued today over the loan-deposit ratio, Bangladesh Bank Governor Fazle Kabir told the reporters at a press conference while unveiling the new monetary policy.

“The banks will have to follow the asset-liabilities and foreign exchange risk management. Strict measure will be taken against banks which will make excessive lending beyond the limit,” he said.

Banks, which have been in a liquidity crisis for the last two months, would have no option but to increase their lending rates further.

“No loan will be given at single digit interest rate,” said a chief executive officer of a private bank. “Already we have hiked our lending rates by 0.5-1 percentage points on all loan products. Bangladesh Bank's tightening stance on money supply will further make loans costlier,” said the CEO.

Syed Mahbubur Rahman, chairman of Association of Bankers, Bangladesh, a forum of CEOs, welcomed the central bank's move to raise the private sector credit growth target, but he feared that slashing the loan-deposit ratio would make lending costlier and fuel inflation as well.

In the new monetary policy, the central bank has kept unchanged the domestic credit growth target at 15.8 percent for the second half of the fiscal year, which according to the governor, would help achieve 7.4 percent GDP target and 6 percent inflation.

Repo and reverse repo policy interest rates have been left unchanged at 6.75 and 4.75 percent but it could be for the time being only.

The governor said, “The new credit growth target will focus on containing the inflationary target while it will also avoid the contraction of domestic credit growth. The new policy will keep giving importance to easing the ongoing pressure of foreign exchange transaction on the economy.”

Fazle said the banks have to face punitive measures in line with the Banking Company Act 1991 if they acted against the interest of depositors and common people. 

The import of capital machineries and industrial raw materials registered a significant growth during the first half of this fiscal year while the global economy boosted growth which was in a stagnant situation, the Bangladesh Bank governor said.

He, however, said the sudden increase of import payments has registered a 2.5 percent depreciation of taka against the dollar in the first half of this fiscal year.

The current account deficit also widened, which has been dealt with in the latest monetary policy, Fazle said. 

Under the circumstances, the private sector credit growth stood at 18.13 percent -- way past the target set for the period, he said.

Such momentum was positive for achieving 7.4 percent GDP growth for the fiscal year, but at the same time it has largely increased the short-term risk over inflationary pressure and foreign exchange zone, he said.          

In the questions-answers session, the governor said he would bring down the loan-deposit ratio with a view to ensure quality of credit.

Asked whether the central bank would give licences to the new banks in line with the government's proposals, he said new banks would be allowed considering the volume of the country's private sector and the existing trend of employment generation.

The board of directors of the central bank would decide in this regard, he said.

Responding to a question, the governor termed the monetary policy “employment focused growth with stability”.

Zahid Hussain, lead economist of the World Bank's Dhaka office, said the overall policy stance remains accommodative to the expected nominal growth in the economy.

The mid-course corrections to the policy laid out in July last sent somewhat mixed signals with an unspecified “new directive requiring banks to rationalise their Advance-Deposit Ratios” and the private credit growth target increased to 16.8 percent from 16.3 percent.

“The MPS [monetary policy stance] is way short on concrete measures to stop the spread of non-performing loans in private banks,” he said.

Zahid said the economy was facing three downsides risks worth serious reckoning -- inflation, external imbalance and financial instability.

The MPS has attempted to address the inflation risk through a monetary programme that allows inflation to be as high as 6 percent. 

“Overall, this MPS appears rather vague on how the monetary authority would handle at least two out of the three key risks looming large in the near term,” said the economist.

Other economists and experts said the initiative to bring down the loan-deposit ratio would protect the interest of the depositors, but it would raise lending rates.

“The rate of interest on lending may slightly increase due to the lower loan-deposit ratio. But, it will not be logical that the banks will increase the rates massively accusing the ratio,” said Salehuddin Ahmed, former governor of the central bank.

Ibrahim Khaled, a former Bangladesh Bank deputy governor, said the commercial banks would adopt a go-slow policy to sanction and disburse large loans ahead of the national elections.

The entrepreneurs would also take the same stance thinking the election year as an “uncertainty period”, so the lower loan-deposit ratio would not create any problems in managing the assets and liabilities of banks, he said.