No clear direction on reducing banks' NPLs  

The central bank has not provided clear instructions on reducing the high non-performing loans (NPLs) of banks. The monetary policy unveiled on Sunday should have strict instructions on how to address the high NPLs in the banking sector.

For example, the Bangladesh Bank could say that it will not provide money in repo (Standing Lending Facility, according to the new policy) to banks that fail to recover NPLs. Additionally, it could refuse to offer forex support and take action against those who do not repay. A contractionary monetary policy worked well then.

The new monetary policy is contractionary, which adversely affects cottage, micro, small, and medium enterprise (CMSME) entrepreneurs. These entrepreneurs are the primary victims of such a policy, as they already struggle to obtain sufficient loans, and the new policy will further limit their access to loans.

While a contractionary policy may be implemented, it should be applied uniformly or specifically to government loans obtained from the banking sector. The contradiction lies in the fact that these loans would not be reduced, which conflicts with the principles of monetary policy. Despite good intentions, there appears to be a discrepancy in the approach.

Despite being contractionary, the new monetary policy is expected to increase inflation instead of reduce it. Inflation cannot be effectively controlled solely by reducing the money supply; it requires an increase in supply. To boost production and increase supply, providing loans becomes essential. However, the new contractionary policy is likely to lead to a decrease in employment within the CMSME sector.

It has been stated that there have been changes to the monetary policy formula. Previously, the focus was on fixing the reserve money, but now it is suggested that it will be managed through adjustments in the interest rate. However, it is worth noting that the effectiveness of interest rate adjustments may not be as significant in countries like ours.

Disclaimer: The content was prepared by TBS correspondent based on an instant reaction over the phone following the announcement of the new monetary policy for the first half of fiscal 2023-24.