Credit Planning:

Macro and Micro Aspects

 Credit Planning at Macro Level

The main objectives of monetary policy of Bangladesh Bank

• Price stability both internal & external.

• Sustainable growth & development.

• High employment.

• Economic and efficient use of resources.

• Stability of financial & payment system.

 Credit Planning at Macro Level

To estimate the total resources available at the national level (including

deposits and currency components) during the budget year and to
ensure that these resources flow to areas and sectors.

At macro level this sort of planning is done by the central bank every year
with the following objectives:

a) To maintain inflation within the safe limit of monetary

expansion.

b) To maintain price stability.

c) To increase production and employment opportunities.

d) To ensure balanced development of all regions and sectors.

e) To maintain socio-economic priorities.

 Contd.
• The macro aspect of credit planning considers the overall volume of
credit expansion to meet the requirements of the economy in the
context of certain broad considerations:

- The overall increase in money supply (currency outside banks +

demand deposits with banks + time deposits with banks) and

- The trends in real output.

 Contd.
• Two factors mainly affect the money supply:

1. Net domestic credit (NDC) to the government, public sectors and

private sectors by the banking sector; and

2. Net foreign assets (NFA) of the banking sector. NFA is

arrived at after deducting the foreign liabilities from the foreign assets
of the banking sector.
• The following equation may be used to depict the relationship between
money Supply (M), Net Domestic Credit (NDC) and Net Foreign Assets
(NFA):

∆ M = ∆ NDC + ∆ NFA
 Contd.
• For credit planning, it is necessary to forecast
(a) Expected ∆NFA and
(b) Expected ∆M
• In order to forecast the ∆NFA, it is necessary to predict the import
payments, export receipts, invisible receipts and payments, transfer
payments and capital flow for a specific period.
• Likewise, the target growth of money (M) has to be determined on the
basis of
(a) Real GDP Growth
(b) Maximum allowable inflation rate.
(c) Cushion rate/monetization ratio/income velocity of money
Target Growth of Money = Rate of Growth of Real GDP + Maximum
Allowable Inflation Rate + Cushion Rate
 Credit Planning at Micro Level
• Estimating the total loanable funds that are likely to be available within
the given period of individual banks and then allocating the same
amongst various alternative uses in conformity with the guidelines
issued by the central bank and priorities. It has the following objectives:

a) Providing credit to right person at right time at right quantity.

b) Getting maximum returns from allocating credit in various

purposes.

c) Ensuring the best alternative use of credit.

d) Achieving declared objectives such as providing credit to

priority sector.
 Estimating the Loanable Funds

• All the deposits of the banking system are not available for lending due
to statutory requirements.
• Banks are required to keep legal reserve in the forms of cash and other
liquid assets on their demand and time deposits with the central bank.
• A part of legal reserve is kept in the form of cash which is known as
Cash Reserve Requirement (CRR).
• Another part known as Statutory Liquidity Ratio (SLR) is kept in the
form of liquid assets (Government and other approved securities,
treasury bills and others).
• The rest of the money can be lent to various sectors.
 Formulating Credit Plan at Branch Level

1. Adherence to the policy guidelines of the head office and

supplementary policy guidelines prepared by the regional/zonal
office on the basis of indicative regional credit plan.

2. Determination and analysis of the command area of the branch

concerned.

3. Finding out the major sectors of the economy of the command area
such as agriculture, small, medium and large scale industry, etc.

4. Dividing the major sectors into different sub-sectors. For example,

agriculture sector may comprise crop, forest, fisheries, poultry etc.

5. Classification of the existing borrowers by occupation and sector.

 Formulating Credit Plan at Branch Level

6. Estimating the additional requirements of funds for the existing

borrowers’ loan accounts.
7. Analysis of the chance of financing new activities in the command
area during the budget year on the basis of current environmental
data.
8. Assessment of funds to be required for the purpose mentioned (7)
above.
9. Determination of the requirement of the incremental loanable funds
by adding columns (6) and (8).
10. Allocation of the said funds to different sectors and client groups
during the plan/budget period by ensuring profitability of the bank
and attainment of social goals.
 Formulating Credit Plan at Regional Level

• Analysis and settlement of the branch credit plan with the Regional
Manager at the Branch Managers’ Meeting in a democratic way.
• Transmission of the regional credit plan to the head office.

Formulating Credit Plan at Head Office Level

• Adherence to the policy guidelines of the central bank regarding

allocation of credits as well as corporate goals and intentions of
bank.
• Correction of regional and sectoral imbalances, if any.
• Settlement of credit plan for the budget year.