The Association of Bankers, Bangladesh (ABB) has urged all the stakeholders concerned to create an enabling environment that will allow the inter-bank foreign-exchange (forex) market to operate effectively.
"Generally speaking, interventions and restrictions in any market distort transparency and impede the normal demand and supply-driven dynamics. This sometimes results in lack of confidence and creates inefficiency and instability," ABB Chairman Selim R F Hussain said, while sharing his observations regarding the present volatility in the market, in an exclusive interview with the Financial Express (FE) on July 27.
The ABB chief also urged all the stakeholders to help make the inter-bank forex market operative and vibrant to ease the ongoing pressure on the market.
"We all must work together to make the inter-bank forex market operative to ensure sourcing of foreign exchange for all banks."
He also said: "We believe that once the interbank forex market is free-flowing, there will be less volatility in the exchange rate in the medium term. The smaller banks, which currently do not have access to any other source of forex funding, will be able to buy the US dollar from the larger banks with surplus."
Currently, all the scheduled banks fix their exchange rates for smaller and retail transactions, including inter-bank ones, in line with the central bank's advice.
However, larger corporate transactions are priced in line with the much higher sourcing costs of overseas remittance - made by international exchange houses.
The ABB's latest observations came against the backdrop of recent volatility in the country's forex market, mainly due to a higher outflow of foreign exchange - following a hefty growth in import payments amid global price rise - compared to the inflow in the last few months.
"The Bangladesh Taka (BDT) has been depreciated against the US dollar as have all currencies in the world. Different steps have been taken by our central bank to minimise the gap between inflow and outflow of the foreign exchange in the market," noted Mr Hussain, also managing director (MD) and chief executive officer (CEO) of BRAC Bank.
The cost of importing commodities, such as gas, petroleum, and capital machinery, have increased year on year by 30-40 per cent, which has resulted in higher demand for the greenback for import payments, he explained.
Currently, the BDT has been maintaining a depreciating trend against the US currency - mainly because of international dynamics.
The local currency has lost its value by Tk 9.20 or 10.72 per cent since January 2022. The US dollar was traded at Tk 85.80 each on January 08.
The dollar was quoted at Tk 95.00 each in the inter-bank market on Wednesday, unchanged from the previous level.
Besides, the inter-bank forex market has been almost non-functional in the recent months, mainly due to lack of coordination among different stakeholders, according to the ABB chief.
"The need of the hour is to closely monitor and manage both demand and supply sides of the US dollar to bring stability in the country's forex market," the senior banker said while replying to a query.
He also noted that the central bank has taken many initiatives, particularly in the last few weeks, to improve supply and reduce demand.
Besides, the central bank has already announced ten regulatory measures - within the first two weeks of the new governor's taking office - to improve the foreign currency liquidity situation in the market.
The regulatory measures include encashing 50 per cent of the total foreign currency held in relevant ERQ accounts, slashing the net open position (NOP) limit of commercial banks by 5.0 percentage points, and reporting to the central bank before opening a letter of credit (LC) for import worth US$3.0 million or above.
The ABB chief also spoke on different issues, including the central bank's recent notification on loan rescheduling and restructuring policy, corporate governance, and cap on lending rate in the banking sector.
Regarding the circular on loan rescheduling and restructuring policy, Mr Hussain said, "It is a big reform in the banking system."
He opined that (issuing) the circular was a prudent and pragmatic initiative of the central bank to ensure credit discipline in the country's banking system, and it would be effective.
On July 18, the central bank relaxed its loan rescheduling and restructuring policy to facilitate the country's overall business activities. Under the new policy, the borrowers were allowed to reschedule their classified loans for fourth time instead of the previous three times, considering recovery of classified loans.
Regarding the capped lending rate, the senior banker said, "Almost all the countries follow a market-driven interest rate pricing, and our central bank will surely consider the situation as and when it is needed."
The Bangladesh Association of Banks (BAB) has already requested the central bank to revise the cap for the cottage, micro, small and medium enterprises (CMSMEs) and retail or personal loans - considering the rising trend in cost of funds.
"The government, as well as the central bank, may consider revising the interest rate cap, particularly for supervised credit, such as CMSMEs," the ABB chair noted.
Earlier, the central bank had instructed all the scheduled banks to fix maximum 9.0 per cent interest rate on all loans, except credit cards, as part of the government's initiative to bring down the rate to single-digit from April 01, 2020.
Besides, the banks were already instructed to fix interest rates on term deposits, with a maturity period of three months and above, at rates no less than the inflation rate - published three months before.
In terms of employment generation, poverty alleviation and overall socio-economic development, the CMSME sector is more important than any other sector in Bangladesh, according to Mr Hussain.