Alternative credit control tools of bangladesh bank

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

Group :-8, 3rdBatch,

Department of Finance3

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

Introduction to Group Members

Law & Practice of BankingCourse code: fin- 1210

Presentation on:

Alternative credit control

tools of Bangladesh Bank

(general discussion)

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

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.

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.

MD. Mehedi Hassan

Roll No. 0915908

Credit Control Tools

Quantitative Methods

Refinancing Policy

Bank RateRediscounting

Policy

Statutory Liquidity

Requirement (SLR)

Open Market Operation

Qualitative Methods

Variable Reserve

Requirement

Cash Reserve Requirement

(CRR)Additional CRR

Directors

General Selective

Informal Methods

Moral suasion

Publicity

**BB : Bangladesh Bank

These Credit Control mechanism were used by BB

9

Recent Credit control mechanism Used by BB

**BB : Bangladesh Bank

Credit Control Tools


Bank RateOpen Market

Operation

Rediscounting Policy / Reverse

Repo

Repo/ Treasury bill and bond

Statutory Liquidity

Requirement (SLR)

Qualitative Methods

Cash Reserve Requirement

(CRR)Moral suasion Publicity

MD. Mehedi Hassan

Roll No. 091590

10

FLOW CHART

Monetary Policy Framework

Information Variables:

Foreign Reserve.

Short- term Interest Rates.

Liquidity Situation.

Domestic Credit.

Inflation and Exchange Rate.

Policy Decision:

Based on market

information and judgment of

the policy makers.

Policy Instruments:

Repo & Reverse

Repo Auctions

Various T-bills Auctions

Setting SLR & CRR

Bank Rate

Goals:

Price Stability.

Economic Growth.

Targets:

(i) Operating Target

Reverse Money

(ii) Intermediate Target

Broad Money

MD. Mehedi Hassan

Roll No. 091590

Year

(end

June)

SLR CRRBank

Rate

Real

deposit

rate

Real

lending

rate

Weighted

avg.

lending

rate

Weighted

avg.

deposit

rate

Interest

rate

(Spread)

12 month

avg.

inflation

(Base:

1995-

96=100)

GDP

growth

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

Table 2: Changes of SLR, CRR and Bank Rate and Impact on Interest Rates(percent)

11MD. Mehedi Hassan

Roll No. 091590

12

The methods by which Central Bank controls the total amount of credit in the economy are termed as

quantitative methods of credit control.

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.


Bank rate

Impacts of Bank Rate Changes

BB

(Bank rate)↑

Effects:

Increase (cost

of credit,

unemployment,

price level);

Decrease

(Production,

export,

investment).

↓

Effects:

Increase (other

interest rate,

investment,

export);

Decrease

(leakage of

domestic

capital, price

level, import).

—

Effects:

An stable

situation is

found

CB

(Interest rate)↑ ↓ —

Borrowers

(Advance)↓ ↑ —

Increase = ↑ ; Decrease = ↓ ; Stable = ‘—’

BB: Bangladesh Bank ; CB: Commercial Bank.

SABEKUN NAHAR SHIRIN

Roll No. 07882734

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.


Roll No. 07882734

14

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

Interest rate

7.58 8

7 7

6 6

5 5 5 5 5 5

7.02 6.95 6.88 6.65 6.72 6.42 6.49

5.36 5.31 5.385.93

5.344.9

0

1

2

3

4

5

6

7

8

9

Pe

rce

nt(

%)

Trends in Bank Rate & Interest Rate

Bank Rate Interest rate


Roll No. 07882734

Effects of Changing Interest rate in Deposit and Lending Rate

Mohammad Mahmudul hasan

Roll No. 09153415

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-

13.6914.0214.1613.8613.7513.1612.7811.0110.93

12.0612.7812.29

6.67 7.07 7.28 7.21 7.03 6.74 6.29 5.65 5.626.68 6.85 6.95

0

2

4

6

8

10

12

14

16

Pe

rce

nt(

%)

Trends in Weighted Avg. (Lending and Deposit) Rate.

Weighted avg. Lending Rate Weighted avg. Deposit Rate

16

2.71

-1.59

0.22

4.42 5.093.95

1.91

-0.18-0.87 -0.48 -0.35

-2.99

9.73

5.36

7.1

11.0711.81

10.37

8.4

5.184.44 4.9 5.58

2.35

-4

-2

0

2

4

6

8

10

12

14

Deposit Rate Lending Rate

Mohammad Mahmudul hasan

Roll No. 091534

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.

17

MD. MAZHARUL ISLAM.

Roll No. 091541

Open market Operation (OMO)

MD. MAZHARUL ISLAM.

Roll No. 091541 18

17.65

4.95

7.258.25

9.158.5 8.65

4.5

6.075

3.15 3.7

5.56.3 6.5 6.65

2.5

0

2

4

6

8

10

12

14

16

18

20

2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Pe

rce

nt(

%)

Trends in Repo and Reverse Repo Rate

Repo Reverse Repo

Repo Reverse repo

Participant

Borrower

Seller

Cash receiver

Lender

Buyer

Cash provider

The Following Table Summarizes the Terminology

Repo and Reverse Repo Rate of last 9 years

Tanzina Islam

Roll No. 09154319

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.

Cash Reserve Ratio (CRR)

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.

Statutory Liquidity Ratio(SLR)

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%

20 20 20 20 20 20 20

16 1618 18 18 18

5 5 54 4 4 4 4 4.5 5 5 5 5

0

5

10

15

20

25

Per

cen

t(%

)

Trends in SLR & CRR

SLR CRR

Tanzina Islam

Roll No. 091543

ISRAT JAHAN ISITA

Roll No. 09159921

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.

Moral Suasion

KHADIZATUZ ZOHARA

Roll No. 091526 22

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.

Publicity

KHADIZATUZ ZOHARA

Roll No. 091526 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.

S. M. SHAHIDUL ISLAM. Roll No. 091622

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.

25

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.



26

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.



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.

Effects:Positive-Labor-market adjustments-Debt relief-Room to maneuver-Tobin effect

Negative-Cost-push inflation-Hoarding-Hyperinflation -Allocative efficiency-Menu cost-Business cycles

An analysis on inflationDemand-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 CostExchange RateOil PriceSupply ShortageMarket SyndicationPolicy Implications

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.

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.

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

34

Any Question?

Group :-8, 3rdBatch, Department of Finance

Alternative credit control tools of bangladesh bank

Economy & Finance

Transcript of Alternative credit control tools of bangladesh bank