Rejaul Karim Byron

---

The central bank yesterday asked commercial banks to bring down their credit-deposit ratio by June 30.

General banks will have to cut down the ratio to 85 percent, while Islamic banks to 90 percent, according to a Bangladesh Bank (BB) directive.

At a meeting with Deputy Governor Nazrul Huda in the chair, the central bank issued a warning to the banks that they can no longer provide "any purpose loans". It also said no banks can collect deposits by offering aggressive interest rates.

If any bank fails to abide by the rules, it will face legal action.

BB held the meeting with 24 banks whose credit-deposit ratio was more than 85 percent till February 4. Of them, 18 are general commercial banks and the rest Islamic banks. The central bank said the directives will be sent to all the banks subsequently.

BB told the meeting that in 2011 the prime objective of the banks will be to ensure stability, while profit earning will be a secondary priority.

BB Monetary Policy Statement (MPS) published on January 30 showed a stringent attitude towards the banks' laxity in credit management and the fresh ultimatum was issued to them in the same tone.

Central bank Executive Director SK Sur Chowdhury and chief executive officers of the banks were present.

At the meeting, BB placed a report which showed that the average credit growth of the banks was 29 percent but the deposit growth was 22 percent, which pointed to flaws in the banks' fund management.

BB asked the banks to submit an action plan on how they will bring down the credit-deposit ratio by the next week. The central bank will monitor the banks' performance every month.

A BB official said if any bank fails to bring down the ratio by the deadline, punitive action will be taken against the bank including non-issuance of new licence to open new branch and its CAMELS (capital adequacy, asset quality, management, earning, liquidity and sensitivity.) rating will also be poor.

In the MPS, the central bank said a faster credit growth compared with the deposit growth indicated a slack attitude of banks through the second half last year in expanding lending commitments.

Slow growth of time deposits than demand deposits (20.6 percent and 42.4 percent year-on-year growth in November 2010 respectively) signified high liquidity preference among the public, presumably for engagements in the capital market, evidenced by hectic trading at the stock exchange.

According to BB, in 2010 the credit-deposit ratio for private banks was 89 percent, which was 73 percent in state banks and 83 percent in foreign banks.

The banks are allowed to lend up to 82 percent after maintaining a statutory liquidity requirement against deposits. If any bank wants to go for aggressive banking, it can raise the ratio to 85 percent by adding capital alongside deposits.

It was revealed that 20 out of 30 private banks lend up to 85 percent against deposits. Some banks lend more than 100 percent, which means they lend by borrowing from the call-money market at higher interest rates.

Lending growth of 30 out of 43 local and foreign commercial banks was found to be much higher than their deposit growth.

Bankers said banks cannot lend more than their deposit.

The BB officials said the banks went into risky banking to make high profits overnight. Recently, the banks made most of such investments in the stockmarket to take returns on investment.

The MPS said BB has initiated necessary corrective and preventive supervisory steps against lending discipline lapses.

In the backdrop of skyrocketing real estate prices, banks were asked in April 2010 not to extend loans for land purchase. Compliance surveillance on permitted ceiling of holding of capital market assets by banks was tightened in June 2010.

In October, general provisioning requirement on bank loans against stocks and shares was doubled to 2 percent. In December, 50 percent margin requirement was made mandatory on all consumer financing.

News: The Daily Star/ Bangladesh/ Feb-21-2011