MPS recognises disruptive powers of classified loans  

Published: February 03, 2019 22:10:25 | Updated: February 05, 2019 22:07:59

The central bank's decision to continue with a cautious monetary stance in the second half of the current financial year (2018-19) is obviously not without a reason. An uptrend in core inflation rate, understandably, has forced it to pursue such a line. But the downward revision, though marginally, of the private-sector credit-growth target is bound to evoke surprise. This is because the flow of credit to the private sector has dwindled in recent months to a significant volume---3.5 per cent lower than the central bank's projection. Under the circumstances, even meeting of the revised target in the second half of the current fiscal would mean a lot.

Undeniably, the current state of credit flow to the private sector is not consistent with the supportive role the central bank intends to play in the case of higher economic growth. The slow growth in private sector credit during the first half of the current FY, despite a notable decline in lending rates, does again highlight the presence of deeper malaise in lending operations and hurdles beyond bank financing. Moreover, it needs to be understood by all the relevant parties that interest rate reduction coming under pressure from influential quarters does not help the cause of greater credit flow to the private sector.

Unless the issue of non-performing loans (NPLs) and factors that have relevance to the cost of doing business are resolved, genuine demand for credit from private entrepreneurs is unlikely to grow. Thus, the latest monetary policy statement (MPS) has duly recognised the huge volume of non-performing loans (NPLs) as one of the key challenges of monetary transmission channels. The NPLs are now hurting both inflow and outflow of funds from banks and making interest rates changes 'less sensitive to policy actions'.

At the policymakers' level of the new government, an urgency to address the NPL situation is being noticed. But, the BB should not wait for the signal from them and it should go by the laws and rules to resolve the NPL issue. There are talks in the air about amending a few relevant laws and rules to help overcome default loan problems. That may be necessary, but the BB as the regulator must uphold its independence, monitor money market and banking operations diligently and take the violators to task according to the legal provisions. The government, on its part, should cease to interfere in the affairs of the central bank. 

The BB in its latest MPS has raised the public sector credit target nearly 2.5 per cent. This implies that the government might borrow in greater volume from the country's banking system. The raise is not that big given the government's reluctance to borrow from the banking system in the recent times. The government has already slowed down the use of savings tools for fund mobilisation and, instead, it has started demonstrating interest in bank borrowing. If the credit demand from the private sector continues to remain subdued, any higher public sector demand for funds from the banking system would not make much of a difference.

Yet higher bank borrowing by the public sector does pose a few risks, particularly in areas of inflation. True, monetary and credit aggregates, according to Bangladesh Bank statistics, are either close to or well below the FY 2019 targets and inflation has been declining in recent months. Yet the MPS, rightly, has not ruled out the possibility of a reverse trend. It might happen in the event of strong domestic demand or exchange rate adjustments done for the sake of maintaining external sector stability. The central bank would, naturally, take appropriate actions to address such a situation. But, the future policy statements of the BB should contain specific policy measures, including tough ones, to address the problem of delinquency on the part of borrowers.

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