The monetary policy statement (MPS), announced Wednesday by the country's central bank for the second half (H2) of the current financial year, maintained a 'cautious' monetary policy stance with slight downward revision of the private sector credit growth target and notable increase in the same for the public sector .
The MPS has kept the policy rates unchanged and described the current state of non-performing loans (NPLs) as a key challenge.
Mr. Fazle Kabir, governor, Bangladesh Bank (BB) promised to lend support to achieving the government's GDP growth target, but made it a point that the central bank would always keep a close watch on inflationary trend.
Classified loans in the country's banking sector pushed up interest rates by around 1.0 percentage point in September 2018, creating a gap between the deposit and lending rates, according to the central bank.
"Non-performing loans (NPLs) remain among the key challenges of monetary transmission channels, making interest rates strictly downward and less sensitive to the monetary policy actions," said the MPS.
The BB's observations came against the backdrop of a rising trend in default loans in the country's banking system in the recent months.
The volume of NPLs jumped by nearly 34 per cent or Tk 250.67 billion to Tk 993.70 billion as on September 30, 2018, from Tk 743.03 billion as on December 31, 2017, according to BB data.
The share of classified loans also rose to 11.45 per cent of the total outstanding loans in September 2018 from 9.31 per cent in December 2017.
Talking to the FE, a BB senior official said liquidity situation in the banking system will improve, if the volume of NPLs reduces. It will also help ease the interest rates on lending.
"The volume of default loans should be reduced immediately for smooth implementation of the MPS," he added.
The MPS also mentioned that market rate-linked rationalisation of NSCs' (national savings certificates) pricing remains an important priority for improving the monetary transmission channels, fostering fiscal sustainability, and developing the bond market.
The central bank unveiled its second half-yearly (H2) MPS on Wednesday, aiming to help achieve 7.80 per cent economic growth by the end of this fiscal year (FY), 2018-19 while curbing inflation.
Mr Fazle Kabir announced the MPS at a press conference, held at the central bank headquarters in Dhaka.
"We're supporting the government's growth target while guarding inflation to remain below the permissible target," the central bank chief said while explaining the main objectives of the MPS.
The BB projects GDP (gross domestic product) growth in the range of 7.5-7.8 per cent for FY 19 with average inflation at around 5.3-5.6 per cent in June 2019.
In the new MPS, the central bank re-fixed the private sector credit growth target at 16.50 per cent for H2 of FY 19 from 16.80 per cent as declared earlier in H1 MPS, while credit growth target to the public sector was increased to 10.9 per cent from 8.5 per cent.
The BB's downward revision came against the backdrop of falling trend in the private sector credit growth in the recent months mainly due to the latest national polls.
Meanwhile, the private sector credit growth came down to 13.30 per cent in December 2018 on a year-on-year basis from 14.01 per cent a month ago, the BB data showed.
The growth was 3.50 percentage points lower than the BB's target of 16.8 per cent for H1 of FY 19.
Possible uncertainty and wariness over the parliament election might have caused the declining trend in the private sector credit growth during the period under review, the BB governor explained.
"We're expecting that the credit growth will gradually pick up, as the election is over. It will reach 16.8 per cent by the end of this FY."
He also opined that the private sector credit growth is enough for achieving 7.80 per cent GDP growth by the end of this fiscal year.
Regarding the NPLs issue, the BB governor said both the central bank and the Ministry of Finance (MoF) are now working on the issue.
Committees have already been formed in this connection, he said, adding that a positive outcome will be visible soon.
A BB senior official told the FE that the central bank is now working to submit some recommendations to the MoF for amending three relevant laws and a set of regulations to help reduce the volume of classified loans in the country's banking system.
The BB will suggest amending Banking Companies Act, Bankruptcy Act and Negotiable Instrument Act along with Merger and Acquisition (M&A) regulations, the central banker added.
The MPS also said the BB's ongoing focus on implementing risk-based supervision and upgrading banks' internal risk management practices and corporate governance would benefit from an effective implementation of the corporate insolvency regimes and increased efficiency in the judicial recourse.
Mentioning the upward trend of core inflation, the BB governor said there is no scope to relax the present cautious stance on curbing inflationary pressure on the economy.
The core inflation increased to 4.65 per cent on annual average basis in December last from 3.59 per cent in January 2018. It was 3.94 per cent in July 2018.
The central bank, however, kept unchanged its domestic credit (DC) growth target at 15.90 per cent for FY 19. Besides targets of broad money (M2) supply and reserve money (RM) remained unchanged at 12 per cent and 7.0 per cent respectively.
The policy rates, including CRR (cash reserve requirement), Repo and Reverse Repo, remained unchanged for H2 of FY 19, according to the MPS.
"BB's focus on strengthening supervision to ensure quality credit growth and rationalising advance-deposit ratio of banks along with asset-liabilities management, foreign exchange risk management helped the banks better align their credit behaviour with deposit mobilisation," it noted.
Among others, BB advisers Allah Malik Kazemi, S K Sur Chowdury and Deputy Governor S M Moniruzzaman, and Bangladesh Financial Intelligence Unit (BFIU) Head Abu Hena Mohammad Razee Hassan also spoke on the occasion.
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