Flight of fund from rural to urban economy

The Bangladesh Bank (BB)'s policy of tightening money supply to combat inflation has been instrumental in pushing up commercial banks' interest rates. The BB has allowed commercial banks to add 3.5 per cent margin to the benchmark rate, the so-called SMART. Notably, the BB in July last year, removed the 9.0 per cent lending cap rate leading to the rise in interest rate spread. Left to the market, banks are charging higher rates of interest against loans. As rural borrowers cannot afford such costly loans, banks have been shifting their investments to the urban centres in increasing volumes. As a consequence, the cottage, micro, small and medium enterprises (CMSMEs) have reportedly been hit hard because with the rise in the cost of credit, the goods they produce are getting costlier and thus losing competitiveness in the market. Small wonder that cheaper imported goods are replacing them gradually. This is bad news for the CMSMEs, which are a major source of rural employment.

In fact, rising cost of fund is affecting every sector of business and economy. But unlike in the urban context, the demand for credit is dropping faster in the rural economy forcing banks to scale down their rural credit operation. According to BB data, the share of the commercial banks' rural investment has declined from 12.02 per cent (in June 2023) to 8.05 per cent by December 2023. In absolute terms, within just six months, banks' investments in the rural areas have shrunk by Tk 0.5 trillion or Tk 500 billion  (from Tk1.74 trillion to Tk1.24 trillion). This is because of withdrawal of financial resources on a massive scale from the rural economy.  The money has gone to the urban areas. What is further concerning is that, as reported on Monday last in this paper, rural deposit rates, too, have declined substantially in recent months. However, this may have to do with the rising cost of living induced by high inflation. The trend is unsettling. From June 2023 till the year end, going by the BB, the share of rural bank deposits declined from 21.27 per cent to 15.23 per cent, or in other words, by 5.04 percentage points.

Clearly, this indicates an increasing rate of rural pauperisation.The government should intervene by way of increasing its financial support for rural communities.  Moreover, the development goes against the spirit of bridging the financial inclusion gap between the urban and the underprivileged rural communities. Early this year, though, this paper carried a report (January 17), which showed a significant surge in rural deposits --- six times higher than urban ones. The credit for that was given to agent banking, an alternative channel to expand financial inclusion of the least privileged in the rural communities. But if the latest BB report is to go by, the enthusiasm that stimulated higher rates of rural deposits seems to have ebbed and the opposite trend has set in. This has to be stopped. Further intensification of agent banking can do this.

Hopefully, the central bank, which introduced agent banking more than a decade back, would further strengthen and expand the service system to help rural communities ride out the ongoing inflationary shock. Also the bankers who work in rural setting should be more sensitive to the needs of the rural entrepreneurs and ensure their access to bank credit without much hassle.