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Alternative credit control tools of bangladesh bank

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

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

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  • 1. Group :-8, 3rdBatch,Department of Finance 1
  • 2. Introduction to Group MembersSerial 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
  • 3. Law & Practice of BankingCourse code: fin- 1210 Presentation on:Alternative credit controltools of Bangladesh Bank (general discussion)
  • 4. Group :-8, 3rdBatch,Department of Finance 5
  • 5. What is credit?Credit is the provision of resources(such as granting a loan) by oneparty to another party where thatsecond party does not reimbursethe first party immediately, therebygenerating a debt, and insteadarranges either to repay or returnthose resources (or material(s) ofequal value) at a later date. It is anyform of deferred payment. The firstparty is called a creditor, also knownas a lender, while the second partyis called a debtor, also known as aborrower.
  • 6. What is credit control?Infrequently used powers ofthe central bank in carryingout monetary policy. Thecentral bank’s authority toassess surcharges on bankreserves and imposereserve requirements onbanks non-bank financialcompanies expired.
  • 7. 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
  • 8. 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
  • 9. FLOW CHART Monetary Policy FrameworkPolicy 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
  • 10. 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
  • 11. Quantitative Methods The methods by which Central Bank controls the total amount of credit in the economy are termed asquantitative methods of credit control. Bank rate The rate which central bank lends money to the commercial banks and discounts bill of exchange iscalled 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
  • 12. Limitations of Bank rate policyBank rate policy would not be effective if there lacks strong linkage between bank rate andmarket/ interest rate especially for a developing country like Bangladesh.If commercial banks have excessive money then bank rate may not be effective because they willlend in lower interest rates though bank rate increases.Bank may successes during the time of prosperity. Because businessmen become highly ambitious oftheir 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 ofdepression. So, bank rate policy has several limitations in its operation. After that it is the best weapon ofcentral bank to control the amount of credit in the economy. SABEKUN NAHAR SHIRIN Roll No. 07882734 13
  • 13. Interest rate Interest rates targets are also a vital tool of monetary policy and are taken into accountwhen 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
  • 14. Effects of Changing Interest rate in Deposit and Lending RateHigh 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 consumerloans and allowed rescheduling of loans without any down paymentWith the easing of inflationary pressure and introduction of 13 per cent cap for lending rate formajor 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
  • 15. 1412 11.81 11.0710 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 11.0110.93Percent(%) 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
  • 16. Open market Operation (OMO) The method by which the central bank controls the amount of credit by selling and buyinggovernment credit instrument is termed as open market operation. Repo and Reverse Repo are two types of instrument for OMO ,introduced in Bangladesh by BBfrom July 2002 and April 2003 respectively. 1.Repo: In a repo, the borrower agrees to sell immediately a security to a lender and also agreesto buy the same security from the lender at a fixed price at some later date. A repo is equivalent to acash transaction combined with a forward contract. 2. Reverse Repo: A reverse repo is simply the same repurchase agreement from the buyersviewpoint, not the sellers. 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
  • 17. 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 14Percent(%) 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
  • 18. 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 countrys 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 theminimum reserve(in percentage of total time and demand liabilities) that a scheduled bank has tomaintain in liquid assets with BB.The rate was set at 18 percent since 2005. Specialized banks are exempted while banks guided byIslamic laws are required to keep reserve at the concessional rate of 10 percent. Tanzina Islam 19 Roll No. 091543
  • 19. The Objectives of SLRTo 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
  • 20. Moral Suasion To make the banking system sound and efficient, Bangladesh bank sometimes requests the commercialbanks to increase or decrease credit. As a guardian’s request, commercial banks follow it and thusamount of credit is controlled in the economy. For instance, given a non-compliant thrift, the Office of Thrift Supervision may increase the numberof inspections, privately tell executives what needs to be done, and use other persuasive tactics tochange the thrifts behavior, rather than simply reporting the violations and fining it accordingly. Theidea behind moral suasion is that sometimes the threat of punishment changes behavior just as well andwith less embarrassment than punishment itself. ISRAT JAHAN ISITA 21 Roll No. 091599
  • 21. Publicity Bangladesh bank applies publicity as a weapon of credit control. Publicity is the deliberate attempt tomanage the publics perception of a subject. Making publicity about the impacts and detriments ofextended credit in the economy, central bank creates public awareness to hold the inflationary trend andthus credit is controlled indirectly.Bangladesh bank publishes weekly, fortnightly or monthly bulletins and annual reports where balancesheets and other business and economic condition of different commercial banks are presented well. As aresult the commercial banks become more careful in the line of their credit creation. KHADIZATUZ ZOHARA Roll No. 091526 22
  • 22. For informing mass people Bangladesh bank sometimes organizes different roadshow, seminar and many other programs. Recently Bangladesh bank organized “UnnoyonerJatra: 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 usesingle method to make credit control effective. KHADIZATUZ ZOHARA Roll No. 091526 23
  • 23. 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 onanalysis and judgments of the nature of economy. Use of some methods cannot give result equally atall the time and circumstances. BB generally uses its credit control instruments considering andanalyzing 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 peopleby taking some steps through issuing some circulars which give order to the CB to take proper stepsto 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 monetarypolicy. As per decision of Bangladesh government(BG) Now BB has given emphasis to agricultureand SME (small and medium entrepreneur) sector. A significant information is that now a farmercan a open an bank account only at taka 10 and apply for a loan. S. M. SHAHIDUL ISLAM. 24 Roll No. 091622
  • 24. 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 economythat a temporary pressure is created in the market due to huge demand for withdrawing money. Toovercome it BB responses in the form of Repo facility to the CBs to help in fine tuning the marketliquidity situation.Global Financial Crisis: During global financial crisis BB takes steps very consciously. Wecan say about the last global recession. Bangladesh economy showed signs of resilience andsuccessfully faced the global recession during financial year 2008.At The Last Year Of Government: Although BB is an independent and autonomousinstitution constitutionally therefore it is highly influenced by BG. Generally at the last year ofthe government it wants to do a lot of development activities. So as per decision of BG BB usesthe instrument open market operation through treasury bill(T-bill) auctions, government billauctions, reverse repo etc. As a result commercial banks find fewer opportunities to extendadvances at that time. S. M. SHAHIDUL ISLAM. 25 Roll No. 091622
  • 25. 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 andvariation in reserve ratio like CRR(Credit Reserve Requirement), and SLR(Statutory LiquidityRequirement) are some direct instruments which control credit. Recently BB is not changing bankrate & reserve ratio to control credit. Bank rate is remained unchanged @5%from FY 2004. AndCRR 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 asto influences the lending policy of the bank. When any unethical practice is done by any CB thenBB uses the instrument Moral Suasion.At last we can say that when which credit control instrument is used by BB is not fixed . Itdepends on situation. S. M. SHAHIDUL ISLAM. 26 Roll No. 091622
  • 26. What is inflation?In economics, inflation is a rise inthe general level of price of goodsand services in an economy over aperiod of time. A chief measure ofprice inflation is the inflation, theannualized percentage change in ageneral price index(normally theconsumer price index) over time.The inflation rate of FY 2009 isestimated 6.50.
  • 27. Effects:Positive-Labor-market adjustments-Debt relief-Room to maneuver-Tobin effectNegative-Cost-push inflation-Hoarding-Hyperinflation-Allocative efficiency-Menu cost-Business cycles
  • 28. An analysis on inflationDemand-pull inflation: caused by increases in aggregate demand due to increased private and governmentspending, etcCost-push inflation:called "supply shock inflation," is caused by a drop in aggregate supply (potentialoutput).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 inflationOther:Import CostExchange RateOil PriceSupply ShortageMarket SyndicationPolicy Implications
  • 29. Executive summary:The research deals with the mechanism of credit control of BDBank in perspective of our economy. The study examines thenoteworthy changes of our monetary policy, overnight market andthe uses of credit control apparatus of our central Bank. It hasintroduced several new arrangements in recent year (e.g. REPO,reverse REPO and Interbank repo operation etc.) . The study alsoillustrates that Bangladesh Bank is following a vigilantlyaccommodative monetary policy to sustain strong public, especiallyprivate sector credit demand and its mechanism of control. Thisstudy will also show, in which circumstances which mechanismwould be appropriate. The experimental results of the presentanalysis show that in the perspective of Bangladeshi monetary policysometime inflation is not awful for our own betterment.
  • 30. 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.
  • 31. Group :-8, 3rdBatch,Department of Finance 33
  • 32. Any Question?Group :-8, 3rdBatch,Department of Finance 34