Over the last few months, it has been noticed that the financial intermediaries, especially the commercial banks, are offering higher interest rates on deposits than they did a year or so back. According to the bankers, the higher interest rates were offered to draw more deposits in order to comply with Bangladesh Bank's (BB) instructions for lowering advance to deposit ratio (ADR). Some banks even exceeded the ADR limits set by the BB by offering more advances to the private sector compared to their deposits. So, they were instructed either to bring down the advances or collect more deposits to keep the ADR within 85 per cent of the deposit, as set by the BB. The ADR was 90 per cent for the Islamic banks, whose transactions are not interest-based. These banks were also told to bring down the advance within that limit. The BB came down heavily on the commercial banks ordering them to live up to the ADR limit when the regulator saw the credit flow to private sector was far exceeding than what was set by it through its monetary policy.
Not only that, being desperate to put a cap on the increasing flow of credit to the private sector, the BB further reduced the ADR to 83.5 per cent from 85 per cent and for the Islamic banks to 89 per cent. The latest initiative means the banks are to further tighten their credit policy, hold more cash and offer less credit to the private sector. Maybe, the BB had another notion in mind while ordering the reduction in the ADR and to keep the banks safe in keeping with their capacity to pay back the depositors' money on demand.
In recent months, at least one bank - Farmers Bank - failed to live up to its pledge to pay back depositors' money on demand. Another reason that might have driven the BB to take such a move is the mounting non-performing loans (NPLs) with the banks. The BB might have thought that if it ordered the banks to reduce ADR, many would be more stringent with their advances to the private sector and more quality advances will be there in the banks' portfolios advances.
The BB allowed more time, up to December 2018, for the banks to bring down either the advances or increase their deposit portfolios. Hence, the banks are in competition in offering higher rate of interest to draw more deposits. In the race to draw more deposits or to keep the already-deposited money with them, all the banks, irrespective of their positions with respect to ADRs, are offering higher deposit rates. It means the deposit rates in the money market are going up and we do not know as of now where they will end up. Did the BB think seriously of the bad side of competitive increase in depositors' rates by the banks? Sometimes, we get puzzled when we see that the BB is seeing only one side of the implication of its policy. The quality of advances is more important than sticking to a fixed ADR. Good banks having good portfolios of advances should not be pressed hard to bring down ADR to 83.5 per cent. By ordering a reduction in the ADR, the BB in a sense is pursuing a concretionary monetary policy. By offering more interest against deposits, total deposits in the economy cannot be increased. Total deposits in the economy are the result of total money supply in the economy and the money multiplier in use.
If the BB tightens money supply, that may also lead to a contraction in the investment. The total deposits available in the economy cannot be expected to go up. Higher rates on deposits will only lead to an increase in lending rates - thereby taking a toll on investment demand. Does the BB want that the private sector receive less credit? For what? Perhaps, it is only because BB fears if private sector receives more credit, it will trigger an inflationary pressure on the economy.
This is a misconceived idea. If the private sector receives more credit at lesser cost, the commensurating output will be coming on line and the apprehended inflationary pressure due to more supply of money will be largely neutralised.
What's happening in the money market is bad for the banks' business as well as the interest of the economy. Increase in depositors' rates and then also in the lending rates is no solution to the problem of bringing back trust in the banks or keeping the banks safe with enough cash money.
Rather, optimisation of the use of resources of the banks can bring further good to the economy and also the much required trust in banks. Forcing the banks to keep more money, as cash or idle, is nothing but forcing banks' money management backward. The non-performing banks should be singled out as per BB's provision of stringent regulatory punishment. But the BB should not punish every bank by the same scale and the same stick. It's better to let the performing banks do more business with their deposits. If they do more business, the government will receive more in revenue and the shareholders will receive more in dividends. The BB is not that strict where it is needed to be, but it is more inclined to be pursuing a monetary policy that goes against the interest of investment demand. By raising depositors' rates, the banks are playing against each other in a zero-sum game. At the end, none will be the winner - only the interest rates will go up and the economy will be harmed by way of affecting investment.
The writer is Professor of Economics, University of Dhaka.
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