Professional Documents
Culture Documents
Bangladesh Bank
Bangladesh Bank
The Bangladesh Bank performs the traditional central banking roles of note issue and banker to
the government and banks. It formulates and implements monetary policy, manages foreign
exchange reserves and supervises banks and non-bank financial institutions. Its prudential
regulation includes minimum capital requirements, limits on loan concentration and insider
borrowing and guidelines for asset classification and income recognition. BB has power to
impose penalties for non-compliance and also intervenes in management of a bank if serious
problems arise. It also provides deposit insurance to small depositors.
The Headquarter of the bank is located in Dhaka with branches in Chittagong, Rajshahi, Khulna,
Sylhet, Barisal, Bogra, Rangpur, and Sadarghat in Dhaka.
Monetary Policy
Until 1990, BB pursued a monetary policy with conflicting. Objectives of (a) controlling overall
monetary expansion and (b) ensuring an adequate flow of credit to priority sector. The first
objective had been pursued primarily through the imposition of credit ceilings and maintenance
of reserve and liquid asset requirement. To achieve the second objective, administered interest
rates in combination with large refinance programme and other direct interventions were used.
The inherent conflict between the two objectives surfaced during 1980s when credit to the
priority sectors expanded in excess of overall monetary considerations. The high levels of
loosely managed lending to priority sector became a burden for banks and a limiting factor for
monetary policy.
It has been recognized that that system of credit ceilings renouncing (at concessionary rates) of
loans to priority sectors and administered interest rate structure have been inimical to resource
mobilization and efficient credit allocation. The allocation of credit has been largely determined
by administrative fiat, rather than by demand and interest rates and has not reflected cost, risk
and efficiency of intermediation. Administered interest rates and rigid monetary policies have
created a non-competitive environment which has discouraged efficiency and service oriented
banking. To improve the efficiency of monetary management BB has made considerable
progress since, 1990 in moving away from previous system of direct control to a gradual
transition toward more flexible and discerning methods of monetary management and control
which entails essentially reliance on reserve and liquid assets requirements flexible interest rates
and open market interventions. Credit ceilings have been eliminated and preferential refinancing
facilities for priority sectors have been replaced by single rediscount window facility at Bank
Rate. In order to effectively use open market operations (OMO) for control of liquidity BB has
been legally authorized to issue its own securities.
Under the administered interest rate regime, Government clearly attempted to provide positive
incentive to savers and at the same time attempted to keep lending rates low in order to keep
investment costs low. An important effect of this potentially conflicting policy objective had
been to squeeze commercial banks margin and reduce their incentive to mobilize deposits. This
had also a number of other unfortunate repercussions.
In view of the disadvantages of administered interest rate policy, BB moved to market oriented
approach to interest rate determination with deposit rates that better reflect market forces and
lending rates that better reflect costs of funds and intermediation costs and risk. Under the new
interest rate policy which became effective in January, 1991. all deposits rates have been
decontrolled except for DPS and some special rates for short term deposits; floors are maintained
for savings and fixed deposits. Lending rates are all freely determined by the market except for
agriculture, small industry and exports.
Changes in interest rate policy have effectively reduced the extent of direct control of interest
rate by BB/Govt. This has resulted greater flexibility and more responsive rate setting. However,
the structure of the banking industry is such that there is insufficient competition. The pricing
policy followed by NCBs seem to be determined by attempts to recover past losses. This cannot
be considered profit-maximizing behavior. The past losses are a sunk cost and should not
influence current loan pricing. Private Banks price loans following the NCBs who act as price
leaders.