how Bangladesh bank control the supply of money in the market and which instruments are mostly used.

1. Group :-8, 3rdBatch,
Department of Finance 1

3. Introduction to Group Members
Serial Name Roll No.
01. Anik Ahmed 091531
02. Md. Mazharul Islam 091541
03. Sabekun Nahar Shirin 07882734
04. Md. Mahmudul hasan. 091534
05. Md. Mehedi Hassan. 091590
06. Tanzina Islam. 091543
07. Israt Jahan Isita. 091599
08. Kadizatuz Zohara . 091526
09. S. M. Shahidul Islam. 091622
10. Md. Aminul Islam. 091561
Group :-8, 3rdBatch,
Department of Finance
3

4. Law & Practice of Banking
Course code: fin- 1210
Presentation on:
Alternative credit control
tools of Bangladesh Bank
(general discussion)

5. Group :-8, 3rdBatch,
Department of Finance 5

6. What is credit?
Credit is the provision of resources
(such as granting a loan) by one
party to another party where that
second party does not reimburse
the first party immediately, thereby
generating a debt, and instead
arranges either to repay or return
those resources (or material(s) of
equal value) at a later date. It is any
form of deferred payment. The first
party is called a creditor, also known
as a lender, while the second party
is called a debtor, also known as a
borrower.

7. What is credit control?
Infrequently used powers of
the central bank in carrying
out monetary policy. The
central bank’s authority to
assess surcharges on bank
reserves and impose
reserve requirements on
banks non-bank financial
companies expired.

8. These Credit Control mechanism were used by BB
Credit Control Tools
Quantitative Qualitative
Methods Methods
Statutory
Open Market Variable
Refinancing Liquidity Directors Informal
Operation Reserve
Policy Requirement Methods
Requirement
(SLR)
Cash Reserve
Rediscounting Moral
Bank Rate
Policy
Requirement Additional CRR General Selective Publicity
(CRR) suasion
**BB : Bangladesh Bank
MD. Mehedi Hassan
8
Roll No. 091590

9. Recent Credit control mechanism Used by BB
Credit Control Tools
Quantitative Qualitative
Methods Methods
Open Market Statutory Cash Reserve
Bank Rate Operation Liquidity Requirement Moral suasion Publicity
Requirement (CRR)
(SLR)
Rediscounting
Repo/ Treasury
Policy / Reverse
bill and bond
Repo
**BB : Bangladesh Bank
MD. Mehedi Hassan
9
Roll No. 091590

10. FLOW CHART
Monetary Policy Framework
Policy Instruments: Targets: Goals:
Repo & Reverse (i) Operating Target Price Stability.
Reverse Money
Repo Auctions
Various T-bills Auctions
(ii) Intermediate Target Economic Growth.
Setting SLR & CRR Broad Money
Bank Rate
Information Variables:
Policy Decision: Foreign Reserve.
Based on market
information and judgment of Short- term Interest Rates.
the policy makers.
Liquidity Situation.
Domestic Credit.
Inflation and Exchange Rate.
MD. Mehedi Hassan
10
Roll No. 091590

11. Table 2: Changes of SLR, CRR and Bank Rate and Impact on Interest Rates(percent)
12 month
Weighted Weighted avg.
Year Real Real Interest
Bank avg. avg. inflation GDP
(end SLR CRR deposit lending rate
Rate lending deposit (Base: growth
June) rate rate (Spread)
rate rate 1995-
96=100)
1997 20 5 7.5 2.71 9.73 13.69 6.67 7.02 3.96 5.40
1998 20 5 8 -1.59 5.36 14.02 7.07 6.95 8.66 5.20
1999 20 5 8 0.22 7.10 14.16 7.28 6.88 7.06 4.90
2000 20 4 7 4.42 11.07 13.86 7.21 6.65 2.79 5.90
2001 20 4 7 5.09 11.81 13.75 7.03 6.72 1.94 5.27
2002 20 4 6 3.95 10.37 13.16 6.74 6.42 2.79 4.42
2003 20 4 6 1.91 8.40 12.78 6.29 6.49 4.38 5.26
2004 16 4 5 -0.18 5.18 11.01 5.65 5.36 5.83 6.27
2005 16 4.5 5 -0.87 4.44 10.93 5.62 5.31 6.49 5.96
2006 18 5 5 -0.48 4.90 12.06 6.68 5.38 7.16 6.63
2007 18 5 5 -0.35 5.58 12.78 6.85 5.93 7.20 6.43
2008 18 5 5 -2.99 2.35 12.29 6.95 5.34 9.94 6.21
2009 18 5 5 11.90 7.0 4.9 6.50 5.90
MD. Mehedi Hassan
11
Roll No. 091590

12. Quantitative Methods
The methods by which Central Bank controls the total amount of credit in the economy are termed as
quantitative methods of credit control.
Bank rate
The rate which central bank lends money to the commercial banks and discounts bill of exchange is
called bank rate. Changes in the bank rate are often used by central banks to control the money supply.
Impacts of Bank Rate Changes
BB Effects:
Effects:
↑ ↓ Increase (other —
(Bank rate) Increase (cost
interest rate,
of credit,
investment, Effects:
CB unemployment,
↑ ↓ export); — An stable
price level);
(Interest rate) Decrease situation is
Decrease
(leakage of found
(Production,
Borrowers domestic
export,
↓ ↑ capital, price —
(Advance) investment).
level, import).
Increase = ↑ ; Decrease = ↓ ; Stable = ‘—’
BB: Bangladesh Bank ; CB: Commercial Bank.
SABEKUN NAHAR SHIRIN
Roll No. 07882734 12

13. Limitations of Bank rate policy
Bank rate policy would not be effective if there lacks strong linkage between bank rate and
market/ interest rate especially for a developing country like Bangladesh.
If commercial banks have excessive money then bank rate may not be effective because they will
lend in lower interest rates though bank rate increases.
Bank may successes during the time of prosperity. Because businessmen become highly ambitious of
their profits in this situation and will borrow money though the interest rate increases.
Reduction in bank rate may not be successful to increase the amount of credit during the time of
depression.
So, bank rate policy has several limitations in its operation. After that it is the best weapon of
central bank to control the amount of credit in the economy.
SABEKUN NAHAR SHIRIN
Roll No. 07882734 13

14. Interest rate
Interest rates targets are also a vital tool of monetary policy and are taken into account
when dealing with variables like investment, inflation, and unemployment.
Reasons for Interest rate change
į1. Risks of investment į4. Deferred consumption
į2. Inflationary expectations į5. Alternative investments
į3. Liquidity preference į6. Taxes
Trends in Bank Rate & Interest Rate
9
8
7 7.02 8
6.95 8
6.88
7.5 6.65 6.72 6.42 6.49
6 7 7 5.93
Percent(%)
6 6 5.36 5.31 5.38 5.34
5 4.9
4 5 5 5 5 5 5
3
2
1
0
Bank Rate Interest rate
SABEKUN NAHAR SHIRIN 14
Roll No. 07882734

15. Effects of Changing Interest rate in Deposit and Lending Rate
High lending rate remains one of the major impediments of investment in Bangladesh.
The BB introduced a 13 per cent interest cap for on lending, except for credit card and consumer
loans and allowed rescheduling of loans without any down payment
With the easing of inflationary pressure and introduction of 13 per cent cap for lending rate for
major sectors, it was expected that the spread would be reduced to a reasonable level.
The present lending and deposit rate are shown here-
Mohammad Mahmudul hasan
15
Roll No. 091534

16. 14
12 11.81
11.07
10 9.73 10.37
8 8.4
7.1
6 5.58
5.36 5.09 5.18 4.9
4 4.42 3.95 4.44
2 2.71 2.35
1.91
0 0.22 -0.18 -0.35
-0.87 -0.48
-2 -1.59
-2.99
-4
Deposit Rate Lending Rate
Trends in Weighted Avg. (Lending and Deposit) Rate.
16 13.69 14.16
14.02 13.8613.75
14 13.1612.78 12.78
12.06 12.29
12 11.0110.93
Percent(%)
10
7.28 7.21 7.03 6.74
8 6.67 7.07 6.29 5.65 5.62 6.68 6.85 6.95
6
4
2
0
Weighted avg. Lending Rate Weighted avg. Deposit Rate
Mohammad Mahmudul hasan
16
Roll No. 091534

17. Open market Operation (OMO)
The method by which the central bank controls the amount of credit by selling and buying
government credit instrument is termed as open market operation.
Repo and Reverse Repo are two types of instrument for OMO ,introduced in Bangladesh by BB
from July 2002 and April 2003 respectively.
1.Repo: In a repo, the borrower agrees to sell immediately a security to a lender and also agrees
to buy the same security from the lender at a fixed price at some later date. A repo is equivalent to a
cash transaction combined with a forward contract.
2. Reverse Repo: A reverse repo is simply the same repurchase agreement from the buyer's
viewpoint, not the seller's. Hence, the seller executing the transaction would describe it as a
"repo", while the buyer in the same transaction would describe it a "reverse repo". So "repo" and
"reverse repo" are exactly the same kind of transaction, just described from opposite viewpoints.
MD. MAZHARUL ISLAM.
Roll No. 091541
17

18. The Following Table Summarizes the Terminology
Repo Reverse repo
Borrower Lender
Participant Seller Buyer
Cash receiver Cash provider
Repo and Reverse Repo Rate of last 9 years
Trends in Repo and Reverse Repo Rate
20
18 17.65
16
14
Percent(%)
12
10
9.15 8.65
8 8.25 8.5
7.25
6 6.075 6.3 6.5 6.65
4.95 5.5
4 4.5
3.15 3.7
2 2.5
0
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Repo Reverse Repo
MD. MAZHARUL ISLAM.
Roll No. 091541 18

19. Cash Reserve Ratio (CRR)
The cash reserve requirement (or required reserve ratio or only reserve requirement) is a bank
regulation that sets the minimum reserves each bank must hold to customer deposits and notes.
These reserves are designed to satisfy withdrawal demands, and would normally be in the form of
fiat currency stored in a bank vault (vault cash), or with a central bank.
The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's
economy, borrowing, and interest rates.
Statutory Liquidity Ratio(SLR)
The Bank Company Act of 1991 in section 33(1), the Statutory Liquidity Requirement (SLR) is the
minimum reserve(in percentage of total time and demand liabilities) that a scheduled bank has to
maintain in liquid assets with BB.
The rate was set at 18 percent since 2005. Specialized banks are exempted while banks guided by
Islamic laws are required to keep reserve at the concessional rate of 10 percent.
Tanzina Islam
19
Roll No. 091543

20. The Objectives of SLR
To restrict the expansion of bank credit.
To augment the investment of the banks in Government securities.
To ensure solvency of banks.
Formula
SLR Rate = Total Demand/Time Liabilities x 100%
25
Trends in SLR & CRR
20 20 20 20 20 20 20
20 18 18 18 18
16 16
Percent(%)
15
10
5 5 5 4.5 5 5 5 5
4 4 4 4 4
5
0
SLR CRR
Tanzina Islam
20
Roll No. 091543

21. Moral Suasion
To make the banking system sound and efficient, Bangladesh bank sometimes requests the commercial
banks to increase or decrease credit. As a guardian’s request, commercial banks follow it and thus
amount of credit is controlled in the economy.
For instance, given a non-compliant thrift, the Office of Thrift Supervision may increase the number
of inspections, privately tell executives what needs to be done, and use other persuasive tactics to
change the thrift's behavior, rather than simply reporting the violations and fining it accordingly. The
idea behind moral suasion is that sometimes the threat of punishment changes behavior just as well and
with less embarrassment than punishment itself.
ISRAT JAHAN ISITA
21
Roll No. 091599

22. Publicity
Bangladesh bank applies publicity as a weapon of credit control. Publicity is the deliberate attempt to
manage the public's perception of a subject. Making publicity about the impacts and detriments of
extended credit in the economy, central bank creates public awareness to hold the inflationary trend and
thus credit is controlled indirectly.
Bangladesh bank publishes weekly, fortnightly or monthly bulletins and annual reports where balance
sheets and other business and economic condition of different commercial banks are presented well. As a
result the commercial banks become more careful in the line of their credit creation.
KHADIZATUZ ZOHARA
Roll No. 091526 22

23. For informing mass people Bangladesh bank sometimes organizes different road
show, seminar and many other programs. Recently Bangladesh bank organized “Unnoyoner
Jatra: Road show- Teqnaf to Tetulia on 26th March to 2nd April 2010.”
Thus Bangladesh bank applies various types of measures to control credit in the economy.
But Bangladesh bank should apply different types of method simultaneously rather to use
single method to make credit control effective.
KHADIZATUZ ZOHARA
Roll No. 091526 23

24. In which situation which credit control instrument is used by BB.
Methods of credit control are different in different cases. The methods are followed depending on
analysis and judgments of the nature of economy. Use of some methods cannot give result equally at
all the time and circumstances. BB generally uses its credit control instruments considering and
analyzing the probable reactions that may be created in the market after using these methods.
Natural Disaster: In different natural disaster BB tries to recover the losses of affected people
by taking some steps through issuing some circulars which give order to the CB to take proper steps
to disburse new loan and to re-schedule the existing loan of the farmers and businessmen.
Increase In Reserve: When BB holds extra reserve then it follows expansionary monetary
policy. As per decision of Bangladesh government(BG) Now BB has given emphasis to agriculture
and SME (small and medium entrepreneur) sector. A significant information is that now a farmer
can a open an bank account only at taka 10 and apply for a loan.
S. M. SHAHIDUL ISLAM.
24
Roll No. 091622

25. In which situation which credit control instrument is used by BB.
Before Some Occasions: Before some occasions like Eid there is a tradition in BD economy
that a temporary pressure is created in the market due to huge demand for withdrawing money. To
overcome it BB responses in the form of Repo facility to the CBs to help in fine tuning the market
liquidity situation.
Global Financial Crisis: During global financial crisis BB takes steps very consciously. We
can say about the last global recession. Bangladesh economy showed signs of resilience and
successfully faced the global recession during financial year 2008.
At The Last Year Of Government: Although BB is an independent and autonomous
institution constitutionally therefore it is highly influenced by BG. Generally at the last year of
the government it wants to do a lot of development activities. So as per decision of BG BB uses
the instrument open market operation through treasury bill(T-bill) auctions, government bill
auctions, reverse repo etc. As a result commercial banks find fewer opportunities to extend
advances at that time.
S. M. SHAHIDUL ISLAM.
25
Roll No. 091622

26. In which situation which credit control instrument is used by BB.
When Bank Rate and Variation in Reserve Ratio are Used: Changes in bank rate and
variation in reserve ratio like CRR(Credit Reserve Requirement), and SLR(Statutory Liquidity
Requirement) are some direct instruments which control credit. Recently BB is not changing bank
rate & reserve ratio to control credit. Bank rate is remained unchanged @5%from FY 2004. And
CRR and SLR are also remained unchanged @ 5% and 18% receptively from FY 2006.
When moral suasion is used: Moral suasion involving friendly persuasion and advise so as
to influences the lending policy of the bank. When any unethical practice is done by any CB then
BB uses the instrument Moral Suasion.
At last we can say that when which credit control instrument is used by BB is not fixed . It
depends on situation.
S. M. SHAHIDUL ISLAM.
26
Roll No. 091622

27. What is inflation?
In economics, inflation is a rise in
the general level of price of goods
and services in an economy over a
period of time. A chief measure of
price inflation is the inflation, the
annualized percentage change in a
general price index(normally the
consumer price index) over time.
The inflation rate of FY 2009 is
estimated 6.50.

28. Effects:
Positive
-Labor-market adjustments
-Debt relief
-Room to maneuver
-Tobin effect
Negative
-Cost-push inflation
-Hoarding
-Hyperinflation
-Allocative efficiency
-Menu cost
-Business cycles

29. An analysis on inflation
Demand-pull inflation:
caused by increases in aggregate demand due to increased private and government
spending, etc
Cost-push inflation:
called "supply shock inflation," is caused by a drop in aggregate supply (potential
output).
Built-in inflation:
involves workers trying to keep their wages up with prices (above the rate of inflation)
Wage-push inflation:
seen as the key reason behind cost-push inflation
Other:
Import Cost
Exchange Rate
Oil Price
Supply Shortage
Market Syndication
Policy Implications

31. Executive summary:
The research deals with the mechanism of credit control of BD
Bank in perspective of our economy. The study examines the
noteworthy changes of our monetary policy, overnight market and
the uses of credit control apparatus of our central Bank. It has
introduced several new arrangements in recent year (e.g. REPO,
reverse REPO and Interbank repo operation etc.) . The study also
illustrates that Bangladesh Bank is following a vigilantly
accommodative monetary policy to sustain strong public, especially
private sector credit demand and its mechanism of control. This
study will also show, in which circumstances which mechanism
would be appropriate. The experimental results of the present
analysis show that in the perspective of Bangladeshi monetary policy
sometime inflation is not awful for our own betterment.

32. Acknowledgment
The paper is prepared under the course – Law & Practice Of Banking
[ Fin- 1210 ] programme titled “The Alternative Credit Control tools Of
Bangladesh Bank : A General Discussion.”
We are very much grateful for giving this sophisticated topic & advising to
prepare to our honorable faculty member-
MOHAMMAD BAYEZID ALI,
Department Of Finance , Jagannath University, Dhaka.
We would like to acknowledge the valuable research support provided
by - ► Dr. Abul Kalam Azad, DGM
Banking Regulation & Policy Dept, Bangladesh Bank.
► Md. Ezazul Islam , Research Economist & Joint Director
Policy Analysis Unit (pau), Bangladesh Bank
We have benefited advice and comments from –
► Sudhir Chandra Das, GM
HRM Dept, Bangladesh Bank
► Md. Akhtaruzzaman , GM & Senior Research Economists
Policy Analysis Unit , Bangladesh Bank.

33. Group :-8, 3rdBatch,
Department of Finance 33

34. Any Question?
Group :-8, 3rdBatch,
Department of Finance 34