Excess liquidity with banks

On November 6 last year Bangladesh Bank reduced the ratio of Statutory Liquidity Requirement (SLR) from 20 per cent to 16 per cent. The purpose behind this was to increase the lending capacity of the banks. The expectation was that the banks would be obliged to reduce their lending rates based on the margin of surplus money in their hands. Obviously it has not worked out that way. The four per cent reduction in the SLR ratio has straightaway increased the liquidity from Tk 7,982 crore in November last to Tk 10,353 crore on the new year's day without being commensurately translated into greater investment.

Bangladesh Bank governor Dr Fakhruddin Ahmed in a meeting with the chief executives of commercial banks has, therefore, called upon the bank chiefs to help increase investment by reducing lending rates. To this the bankers have said that non-economic factors like the free fall in law and order which made the business community feel unsafe, extortion and corruption have dampened the desire for investment. Entrepreneurs are going slow in anticipation of troubled times ahead. 'Even sanctioned loans were not taken for fear of risk factors', that's how one of the bankers has succinctly put it.

Tap here to add The Daily Star as a trusted source

While there cannot be any second opinion about the uncongenial environment for investment, one economic missing link is perhaps being glossed over here. Dwelling on the question of making lending operations attractive, this is what we had commented earlier on: the margin between deposit rate and interest rate in our context is seven per cent which is too high; it has to be three per cent to boost investment all round. The costs of running banks and that of interest in particular are very high. If these could be reduced with banking efficiency and managerial skill the lending rates could be brought down. The bottom-line is: we provide security to investors and improve the terms of investment.