The half-yearly Monetary Policy announced in Dhaka on Sunday detailed steps that the central Bangladesh Bank has taken in the field of banking sector.
The statement said, BB has initiated necessary corrective and preventive supervi sory steps against lending
discipline lapses in banks leading to loan diversion into unauthorized uses, holding bank CEOs responsible for oversight on loan utilization (November 2010). In the backdrop of skyrocketing real estate prices, banks have been 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, with revised reporting instructions and supervisory arrangements.
In October 2010, general provisioning requirement on bank loans against stocks and shares was doubled to two per cent.
In December 2010, fifty per cent margin requirement was made mandatory on all consumer financing; and mandatory adjustment period of current overdrafts to rice traders was reduced to 30 days, to curtail tendency of speculative hoarding.
Besides the above mentioned supervisory measures to influence sectoral composition of credit, monetary policy measures adopted to influence cost and volume of credit included i) half per centage point increases in CRR and SLR for scheduled banks from mid May, and once again from mid December 2010, and ii) one per centage point increase in BB’s overnight repo and reverse repo interest rates from August 19, 2010.
Impact of these measures in the credit market remained largely imperceptible until towards the end of Q2 FY11, swamped out by seasonal large currency withdrawal spikes customary on occasion of the two Eid festivities.
The impact started showing up clearly from December in H2 FY11, coupled with pressure on market liquidity caused by heavy outflows for imports and other external payments such as income surplus/profit/ dividend repatriation by foreign ventures repatriation of post tax income surpluses of foreign airlines, shipping lines and so forth. Repo liquidity infusion in the market from BB had to be increased substantially following the CRR increase in mid- December, to ease the strong outflow related strains mentioned above.
The episode of pressure on liquidity brought to surface significant mismatches of Asset Liability Maturities in some banks, causing these to create unusually high spikes in overnight interbank interest rates.
BB has since been intrusively monitoring the ALM management practices in these banks.
BB’s mid-December infusion of repo liquidity much larger than the liquidity withdrawn by CRR increase has been questioned in some quarters as being tantamount to negation of the CRR increase, but the analogy is not correct.
CRR ties up with BB part of a scheduled bank’s own funds that it could use in credit creation, funds tied up as CRR are not remunerated.
Repo is a transient (overnight) facility at a cost to tide over liquidity difficulties arising from earlier commitments, not at all suitable for use in expanding customer lending.
A sharp price correction came about in the beginning of January 2011 in the country’s capital markets seen by analysts as overvalued from quite some months ago.
SEC and other concerned authorities moved quickly with confidence restoration measures (mainly activation of institutional investors in playing their due roles), successfully putting the market back on its feet after a day in freefall and trading stoppage.
Some quarters incorrectly attributed the sharp capital market price movements to the money market liquidity situation following the mid-December CRR increase.
Selling pressures that forced the price movements had little if anything to do with money market liquidity.
Investors offloading part of existing stockholdings to raise cash for three upcoming IPO subscriptions were apparently the proximate factors behind selling pressure that triggered the price correction; in just one of the three IPOs (of MJL), subscriptions worth Taka 26.4 billion were received against issue offer for Taka 6.1 billion.
The few banks with capital market asset holdings beyond permissible limits were allowed extended periods to scale down to permitted levels gradually, and had no reason to cause abrupt selling pressure.

News: The Independent / Bangladesh/ Feb-01-2011