The central bank yesterday said people who now blame Bangladesh Bank (BB) for its inaction in dealing with the banks' overexposure to the capital markets had once put pressure on the BB to go soft on the banks' links with the stockmarket.

“It is curious that those now blaming the BB for inaction were themselves actively lobbying to pressurise the BB to prolong compliance timelines for banks,” the central bank said in a statement yesterday after a meeting with business leaders.

The Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) on Sunday blamed the BB for not taking actions against the errant banks that had invested heavily in the stockmarket to make quick profits.

FBCCI President AK Azad said they raised the issues of liquidity crisis and interest rate. "The central bank told us that the situation is improving and the problems will be over soon,” he added.

BB Executive Director Jahangir Alam said, “We have told the businessmen that the banks do not have any liquidity crisis.”

The central bank in a written statement said the assertion in FBCCI's press bulletin that the BB did nothing to restrain banks from capital market investments beyond statutory ceiling is incorrect.

The BB asked banks to set aside their 2010 capital market investment gains for adjustment of subsequent losses, it said.

Banks are free to make their business decisions about investment of the post-adjustment remainders in the capital market, and there can be no question of coercing them to do so by a BB directive.

On the FBBCI's demand for imposing cap on the rate of interest on loans, the BB said, with inflation high and rising, the banks cannot attract deposits at low interest rates from individuals, households and businesses; and rising deposit interest rates necessarily push up lending interest rates.

Imposing ceilings on deposit and lending interest rates will worsen matters, hurting growth in deposits and the volume of available credit.

The BB also said, only by bringing down credit expansion to levels commensurate with nominal growth of the economy, inflation level can be brought down, in turn bringing down the deposit and lending interest rates.

The lending rate caps still remaining on credit for some essential and productive purposes are proving counterproductive, reducing credit access for these purposes, creating a sense of liquidity crunch, the central bank said.

Fighting down the rising trend of inflation is now a key concern in all economies -- developed and developing, the BB said.

It said, the lending and deposit interest rate ceilings in China mentioned ,in FBCCI's press bulletin are remnants of their communist era practices; and China has acted far more aggressively in fighting down their inflation rate, which is only half that of Bangladesh.

Since January 2011, China has raised interest rates four times, while Bank of England has done so twice. India has raised Indian policy interest rates nine times from January 2010, against thrice by the BB.

Bigger businesses in Bangladesh can contribute significantly in easing the rise in domestic lending interest rates by leaning less on local banks for term financing of their investment projects.

This will also ease depreciation pressure on exchange rate of the taka, and help avoid buildup of asset liability maturity mismatch in books of local banks, the BB said.

It said the rise in deposit interest rates is already showing pickup in deposit growth, improving market liquidity and the volume of loanable funds.

"We believe the business community is fully aware of the necessary tradeoffs in short term adjustment pains for stable, sound growth over the medium and longer term," the BB said in the statement.

In the current local and global inflationary environment, it is impracticable to continue with lending rate caps imposed during the global downturn.

The central bank is closely monitoring interest rate practices of individual banks to weed out practices or tendencies unfair or undesirable from consumer protection viewpoint, the BB said.

The BB will look into specific grievances of individual businesses in this respect for prompt redress, it said.

Source: The Daily Star/Bangladesh/May 31, 2011