BB steps in to calm worries
The central bank has identified excessive credit growth, both in government and private sectors, over the last few months as the probable reason for the current inflation worries and rising food prices, officials said.
Bangladesh Bank (BB) also found that commercial banks are increasingly becoming dependent on the central bank to meet growing credit demand for financing investment ventures. The BB has, consequently, made the money from the bank costlier.
As a move to discourage the banks to borrow from the central bank, the BB has hiked the Repo rate after more than three years. The central bank, through Repo auction, injected over Tk 2,100 crore at 8.75 percent interest rate on Wednesday, raising the rate of 8.50 percent that prevailed over the past three years.
According to BB data, the credit growth over fiscal 2007-08 was 26.11 percent and 30.41 percent in private and government sectors, respectively.
The credit growth for the private sector rose 1.07 percent in July 2008 compared to 0.46 percent in July last year, while the credit growth in the government sector in July this year rose to 3.16 percent from 2.99 percent of last year.
The BB reset the interest rate on Repo auction at 8.75 percent Wednesday from the prevailing 8.50 percent on its lending of fresh funds to commercial banks and non-banking financial institutions (NBFIs).
“The BB has increased the interest rate for Repo (repurchase agreement) auction Wednesday to discourage banks and non-bank financial institutions to borrow from the central bank,” a senior BB official said.
“This is a temporary measure. The BB has increased the interest rate for Repo auction considering the overall liquidity situation in the money market,” the official said.
The interest rate for Repo auction has been increased to give banks a signal that they (banks) should lend by their own funds, not by borrowing from the BB, he added.
The central bank found that banks are financing more and more on trading and are getting involved in risky lending by crossing the BB set limit, restricting them form lending more than 82 percent of their deposits.
According to BB statistics, most of the private commercial banks have been found lending more than 82 percent of their deposits. Some other banks' lending has been found surpassing their deposits, meaning that they rely on borrowing from the BB for meeting their demand for cash.
“The BB has started making a list of banks that are violating central bank's set limit for lending,” another BB official said.
The central bank would also consider applying other tools, if the banks do not rein in their soaring credit financing, he said.
The BB is also worried with the soaring inflationary pressure. According to government data, inflation reached 10.04 percent on point-to-point basis in June from 7.44 percent in May 2008.
Meanwhile, fund managers of different commercial banks said the inter-bank call money rate remains stable for the last two days after its hike to 18 percent on Monday.
“The call money rate hovered between 12 and 14.5 percent today (Thursday),” said a fund manager at state-owned Janata Bank. He said the banks' demand for liquidity is more than that of the NBFIs.
Some banks still have a huge demand for liquidity due to customers' demand for cash ahead of the Eid festival. The National Credit and Commerce Bank sought Tk 190 crore from the BB through Repo auction yesterday, said an official of the bank, to meet the demand.
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