Idle money worries banks

Weak domestic demand, slow lending hit economy

29 March 2014 Kazi Zahidul Hasan

Although the government policy makers are stepping up efforts to create more favourable conditions for both local and foreign investors, the economy is still very sluggish and facing challenges like weak domestic demand and slow bank lending, economists said on Friday.
They said banks are sitting with excess liquidity as investment demand has been slowing due to persistent uncertainty in the country's political arena. If banks fail to spur lending to businesses it would further dampen the economic growth, they added.
Sources in the central bank said that the idle fund in the banks reached Tk one lakh crore up to the first week of March this year as a result of sluggish investment demand.    
 "A credit squeeze gripping financial markets is beginning to trickle into the broader economy. This is going to affect industrial expansion and job creation," Prof Abu Ahmed, a noted economist, told The New Nation yesterday.   
He added, the present scenario suggests that individuals and big business houses are still worried about the political climate of the country and so they are not willing to take a risk for expanding their businesses.
 "It's hard for banks to accelerate credit growth now unless a smooth business climate is restored here," he noted. A stable political situation can only help building confidence in the minds of the investors and later it could spur lending business.
Prof Ahmed mentioned that the slow pace of loan growth is not only affecting the gain in net interest income of the banks but also hindering their business expansion.    
 "The central bank should step up measures to lower lending rates to prop up banks' lending business. Once the banks come up with lower rates of interests it may create credit appetite to the investors," he suggested.    
Terming the continued squeeze in bank lending as an unwelcome development for the country's economic growth, a former central bank governor Dr Salehuddin Ahmed said, the lending curb is going to leave a short and medium-term risk on the economy which has already showed signs of a slowdown taking a heat from the infrastructure bottleneck coupled with political uncertainty.
The impact will depend on the length of the squeeze. So far the impact appears moderate. But, in case of failure to bringing the huge idle money into investment,    in the long run its impact would be huge on the economy, he added.
The former central bank governor, however, urged the country's banking sector regulator to come up with supportive credit policies for the small and medium enterprises (SMEs) to overcome the present situation.
 "SMEs are key driver to growth and if the central bank can ensure adequate credit to the sector it can give a fresh boost to the banks lending business," he added.         
 "Poor credit demand could result in lower GDP growth," said former adviser of the caretaker government Dr AB Mirza Azizul Islam.
The banks have failed to inject funds into the market as a result of political uncertainty. Although a political stability is in sight, the investors are still observing the situation fearing further uncertainty," he added.
Building an excess liquidity is not good for the economy and it has an obvious adverse impact on it, he said, adding: Investment is very much interlinked with the growth and once the trend of investment remains sluggish it would ultimately retard the growth.

Add Rate