The Dhaka Stock Exchange ended flat yesterday as investors mostly refrained from injecting fresh funds into the market amid anticipation that the central bank could take measures in the upcoming monetary policy to curb credit growth.
The benchmark index, DSEX, gained 6.88 points, breaking the five-day losing streak to close at 6,179. Daily turnover fell 13.15 percent to Tk 381 crore from the previous session.
The key index lost 123.52 points throughout the week.
The Bangladesh Bank plans to rein in liquidity flow by cutting advance deposit ratio (ADR) to avert inflationary risk amid high growth in the private sector credit.
The measure may come in the upcoming monetary policy for January-June likely to be announced next week, according to a central bank official.
The ADR could be brought down to 80.5 percent from 85 percent now in order to pull out money from the market.
The move will force banks to mobilise deposits to adjust to the new ADR limit, he said.
The BB will use the ADR as a tool to increase the deposit rate and curb high import growth, said the official.
The average ADR was near 75 percent as of October last year, according to the central bank data. The ADR limit is 85 percent for commercial banks and 89 percent for Shariah-based banks.
The ADR issue put a damper on the stockmarket keeping the daily turnover below Tk 500 crore throughout the week.
The credit flow to merchant banks and non-bank financial institutions will be interrupted if the ADR is cut, said Mohammed Rahmat Pasha, managing director of UCB Capital Management.
He said money would flow to banks if deposit rate goes up. He added investors adopted a wait-and-see approach instead of participating in the trading in the week.
Among the large cap sectors, only pharmaceuticals showed resilience to a bit, gaining 0.32 percent, while banks, cement and non-bank financial institutions fell 3.92 percent, 3.72 percent and 3.07 percent respectively.
Average daily turnover dropped 14 percent to Tk 446 crore compared to the previous week.
This week saw news broke that the central bank would tighten the credit growth in order to stop any potential liquidity crisis, according to LankaBangla Securities.
“This had an adverse reaction on the banking stocks,” the brokerage house said in its daily market analysis.
Though the average ADR was within the limit, some banks were lending beyond the authorised cap taking the private sector credit growth to 19.06 percent in November last year. The growth rate was far above the monetary policy target of 16.2 percent set for the July-December period.
A 14-percent credit growth is enough to help achieve 7.4 percent GDP growth objective set by the government for FY2017-18, said a senior economist of the BB.
“But the credit growth has already hit 19 percent and it is quite abnormal,” he said.
The economist said the default loan rate was supposed to be low amid the high credit growth, but it did not happen which indicates that the lending was not qualitative.
The default loan rate averaged 10.67 percent as of September, according to central bank data.
There is chance of abusing banks' credit in the election year, said Khondaker Golam Moazzem, research director of the Centre for Policy Dialogue.
“From this perspective, the central bank move will keep the money flow under control,” he said.
He said the tightening of the ADR is likely to hamper investment, but the impact would be minimum.
The financial market will see a jump in interest rate of fixed deposit if the ADR is reduced, according to MA Halim Chowdhury, managing director of Pubali Bank.
“However, the move will stop the aggressive lending of some banks,” he added.
The average deposit rate was slightly up at 4.9 percent in November, from 4.89 percent in the previous month.
Deposit growth was 11 percent year-on-year in October last year against the credit growth of 18.5 percent.
Deposit totaled Tk 900,000 crore in October when the total credit was Tk 800,000 crore, central bank data showed.