Bangladesh Bank to remain highly vigilant to ensure quality and purpose of loan

Despite huge surplus in liquidity in the banking system that has already created a price pressure risk, the Bangladesh Bank (BB) continued its ongoing expansionary monetary policy to support investment and employment generation.

In the new monetary policy for current fiscal year announced today, BB said that it will remain highly vigilant to ensure quality and purpose of loans.

Though, there is need of tightening the money supply, but the central bank kept a loose policy considering the ongoing pandemic, said the monetary policy statement.

It, however, hinted that anytime it may take policy measures to tackle excess liquidity based on inflationary pressures.

"Understandably, BB intentionally refrained from conducting any liquidity sterilisation action as part of its employment and investment supporting pro-growth expansionary policy stance considering the COVID-19 pandemic and maintaining safe positions of the key anchoring monetary and credit variables and supporting interest rate rationalisation efforts on lending. Looking ahead, BB will remain vigilant, continuously monitoring the commodity and assets price developments, along with the progress in money as well as foreign exchange markets, and will take appropriate policy measures as required."

Though, the private sector credit growth was 8.4% in the last fiscal year, the central bank wants to take it to 14.8% this fiscal keeping the highest ceiling unchanged.

"Virtually, banks are now operating almost all of their lending activities well below the 9 percent interest rate cap and the existing lower trajectory of lending interest rate along with robust growth in deposits can be a blessing for enhancing the private investment and economic activities during the post COVID period," said monetary statement.

"BB's cautiously designed expansionary and accommodative monetary policy stance along with the implementation of ongoing various stimulus packages on top of low base effect is likely to augment the private sector credit growth to its program level."

Bangladesh Bank Governor Fazle Kabir, in his written speech, said, "Against the backdrop of the ongoing pandemic, the basic challenges that BB may encounter in the coming months are restoration of full normalcy in life and extending required fund flow to production pursuits, especially those which have become inoperative causing some degree of job and income losses. To this end, BB will attach huge emphasis on full implementation of the government's stimulus packages, alongside strengthening its own refinancing windows in the coming days.

"For this purpose, BB will consider to adopt all possible policy options for encouraging new entrepreneurs and for generating new employment opportunities which includes: continue the ongoing refinance policy with more focus on micro-, small- and labour intensive medium- enterprises especially for the eradication of urban poor existing in the transportation, tourism, hospitality, healthcare and small businesses; fully operationalise its credit guarantee scheme to expedite CMSMEs financing, particularly towards the light engineering, cluster and value chain, and women entrepreneurs' development; permit banks and financial institutions for opening technology driven sub-branch in the rural remote areas by engaging their own-recruited minimal workforce for creating quality jobs and enhance financial inclusion alongside ensuring proper safety and security; and bring the education sector, perhaps the most affected sector due to COVID-19 pandemic, to the refinance scheme so that both the needy teachers and the students can get their minimum required amount of loans for purchasing necessary electronic equipment, smart devices."

According to his speech, the observed reality of the above economic indicators suggest that the monetary program and policy stance for FY22 need to ensure required flows of funds to all the productive sectors to generate much needed investment and employment to support the government's pursuits of protecting the economy from the devastation of the ongoing pandemic, while remaining watchful about the prime goal of maintaining price stability.

BB's thrust will be to persuade banks and financial institutions to adopt such a strategy so that adequate financing support could be available to all the priority sectors like agriculture, CMSMEs, manufacturing industries, and the somewhat vulnerable sectors such as small businesses including tourism, hotel and restaurant, transportation, privately-run education and training centres, and those sectors where the marginalised are formally or informally employed.

Side by side, appropriate prudential measures are required to ensure proper use of the fund, preventing any sort of misappropriation. Thus, this monetary policy will try to proactively arrest any deterioration of aggregate demand by supporting new investment and employment generation, and help create enabling conditions for the businesses to normalise production and supply chains, streamlining the proper use of the fund, according to his speech.

The Bangladesh Bank unveiled its monetary policy for FY22 in its website today.