BB puts private sector credit on leash

In a bid to ease pressure on inflation, Bangladesh Bank (BB) yesterday fixed the target of private sector credit growth at 18.5 percent, bringing it down by 6.44 percentage points.
The BB took the decision at a time when different countries have taken steps to increase credit flow amid global financial crisis.
Central bank Governor Dr Salehuddin Ahmed yesterday announced the monetary policy for January to June period and said: "As the Bangladesh economy has not faced large capital inflows or credit crunch amid the ongoing global financial turmoil, there is no need for any blanket economy-wide stimulus."
The BB in its monetary policy statement said private sector credit growth, which was 24.94 percent in last fiscal year, rose to 26.5 percent in September 2008 and was brought down to 24.31 percent in November. There is a plan to bring it down to 18.5 percent by June, the statement said.
However, target has been fixed to increase public sector credit growth including net government credit by 15.38 percentage point to 27.25 percent by June 2009. In the last fiscal the growth was 11.87 percent. In November the public sector credit growth increased to 23.02 percent.
The BB governor also said: "Specific sectors and their financiers may however face difficulties if the slowdown in global economy hurts our export growth drastically. If and when that happens, the affected sectors will need to be provided with timely monetary and fiscal support as appropriate."
The BB monetary policy conforms to the policy of the new government, Salehuddin said, adding that unnecessary loan would be discouraged to avert inflationary pressure, and for this monetary tools will be used in such a way that the growth is not affected.
The monetary policy statement said: "BB will continue to support adequate credit growth for activities facilitating production and supply of goods and services, providing refinance against lending in the priority sectors such as SME, agriculture and low-cost housing under-served by the market."
However the central bank will discourage excessive expansion of non-essential consumer credit and similar demand-side lending.
On discouraging unnecessary loan the statement said: "Apart from delaying pass through of declining international prices into domestic consumer prices, the high credit growth has created bubble-like pressures on real estate prices."
The high credit growth is also causing high asset growth in non-essential, even wasteful 'lifestyle' loans for such purposes as ostentatious wedding festivities, holidaying abroad and conspicuous consumption, the statement added.
Rapid growth of such lending particularly by the private sector banks has predictably caused some recent worsening of their asset quality.
"Against this backdrop, BB's enhancement of repo and reverse repo interest rates by 25 basis points in September and November 2008 respectively sought to nudge credit growth towards the targeted programme path consistent with the GDP growth and inflation objectives," said the statement.
The BB said attainment of the initially projected 6.5 percent real GDP growth in FY09 therefore still remains a realistic possibility subject to export growth not weakening very substantially.