FE Report (January 31, 2011)
Bangladesh Bank (BB) on Sunday cautioned all concerned of a "painful" crash in the country's overheated real estate sector and admitted that a large chunk of credit meant for industries and small and medium enterprises (SMEs) have been diverted to the capital market.
In its half year monetary policy statement, the BB said, the country needs a "properly priced capital and real estate markets to avoid instability and jitters".
"Overheated, overpriced markets typically collapses in crashes hurtful for all; the crashes are more painful the longer the price corrections are delayed," the BB said in the statement.
It was particularly worried about forming of a bubble in the housing sector, which the BB said was not driven by credit and where the central bank's monetary and credit policies have limited impact.
"Appropriate cooling off interventions have assumed urgency in the overheated real estate markets to avoid an eventual painful crash," the BB said
The central bank released the statement at a press conference at its head office. Its officials, however, took no questions on the asset price bubbles that the BB has warned of in the written statement.
Real estate prices in the capital Dhaka have shot up by more than 300 times since the country's independence, prompting some experts to forecast an imminent bubble burst in the market.
Despite its limited role in the property market, the BB last April asked the country's 40 plus commercial banks not to extend loans to land purchase in an attempt to rein in sky-rocketing prices.
It said the best way to contain the bubble would be through fiscal measures, especially by collecting capital gains tax based on actual transaction values of the land rather than on much lower fictitious values.
Realtors typically undervalue land price in order to evade taxes. According to some analysts, the government lose tens of billions of takas in land revenue due to the decade-old malpractice.
The BB said the capital market must be steadied following the January crash, driving home the message that its stability is important for sustaining the country's economy on a high growth path.
"Soft landings, always hoped for, are seldom achieved. The price correction coming about in the capital market in early January 2011 is therefore required to be steadied and stabilised carefully," it said
The BB had earlier sought detailed information from commercial banks about any diversion of credit meant for real sectors to the stock market and the deadline for submission of such reports was extended twice. Later on, after the crash of the stock market this month, the BB has put on hold its directive to this effect.
According to the BB's latest statistics, credit to the private sector grew 27.8 per cent, industrial term loan 38.3 per cent and SMEs 42.9 per cent year-on-year in November 2010.
"Credit to private sector has thus been expanding much in excess of what may be reasonably needed for attaining the targetted real and nominal Gross Domestic Product (GDP) growth," the BB said.
It said although these figures "apparently portray healthy composition of productive lending, its probes have found "instances of industrial and SME loans diverted to the overheated asset markets."
The BB rejected some analysts' observation that its mid-December hike in Cash Reserve Requirement (CRR) sparked the crash at the Dhaka and Chittagong Stock exchanges.
"Selling pressures that forced the price movements had little if anything to do with money market liquidity," the bank said, holding cash withdrawal by three IPOs as being mainly responsible for the sudden slump.
"Investors offloading part of existing stockholdings to raise cash for three upcoming IPO subscriptions were apparently the proximate factors behind selling pressure that triggered the price correction," it said.
In one of the three IPOs, the Mobil Jamuna Limited alone received subscriptions worth Tk 26.4 billion against the issue offer for Tk 6.1 billion, it said.
The few banks with capital market asset holdings beyond permissible limits were allowed extended periods to scale down to permitted levels gradually, and had no reason to cause abrupt selling pressure, it added.
As part of its move to curb fund diversion, the BB said it has initiated corrective and preventive supervisory steps against lending discipline lapses in banks leading to loan diversion to unauthorised uses.
It said Chief Executive Officers of the banks would be held responsible for oversight in loan utilisation -- a move mainly stemmed from BB's findings of the fund diversion.
The central bank also warned that it would sternly deal with "lapses and laxities" in banks' lending practices, eschewing forbearance.
It however, urged the regulatory regime namely the Securities and Exchange Commission (SEC) to provide sufficient safeguards against "foaming and frothing of stock prices by unscrupulous market players."
Bangladesh Bank (BB) on Sunday cautioned all concerned of a "painful" crash in the country's overheated real estate sector and admitted that a large chunk of credit meant for industries and small and medium enterprises (SMEs) have been diverted to the capital market.
In its half year monetary policy statement, the BB said, the country needs a "properly priced capital and real estate markets to avoid instability and jitters".
"Overheated, overpriced markets typically collapses in crashes hurtful for all; the crashes are more painful the longer the price corrections are delayed," the BB said in the statement.
It was particularly worried about forming of a bubble in the housing sector, which the BB said was not driven by credit and where the central bank's monetary and credit policies have limited impact.
"Appropriate cooling off interventions have assumed urgency in the overheated real estate markets to avoid an eventual painful crash," the BB said
The central bank released the statement at a press conference at its head office. Its officials, however, took no questions on the asset price bubbles that the BB has warned of in the written statement.
Real estate prices in the capital Dhaka have shot up by more than 300 times since the country's independence, prompting some experts to forecast an imminent bubble burst in the market.
Despite its limited role in the property market, the BB last April asked the country's 40 plus commercial banks not to extend loans to land purchase in an attempt to rein in sky-rocketing prices.
It said the best way to contain the bubble would be through fiscal measures, especially by collecting capital gains tax based on actual transaction values of the land rather than on much lower fictitious values.
Realtors typically undervalue land price in order to evade taxes. According to some analysts, the government lose tens of billions of takas in land revenue due to the decade-old malpractice.
The BB said the capital market must be steadied following the January crash, driving home the message that its stability is important for sustaining the country's economy on a high growth path.
"Soft landings, always hoped for, are seldom achieved. The price correction coming about in the capital market in early January 2011 is therefore required to be steadied and stabilised carefully," it said
The BB had earlier sought detailed information from commercial banks about any diversion of credit meant for real sectors to the stock market and the deadline for submission of such reports was extended twice. Later on, after the crash of the stock market this month, the BB has put on hold its directive to this effect.
According to the BB's latest statistics, credit to the private sector grew 27.8 per cent, industrial term loan 38.3 per cent and SMEs 42.9 per cent year-on-year in November 2010.
"Credit to private sector has thus been expanding much in excess of what may be reasonably needed for attaining the targetted real and nominal Gross Domestic Product (GDP) growth," the BB said.
It said although these figures "apparently portray healthy composition of productive lending, its probes have found "instances of industrial and SME loans diverted to the overheated asset markets."
The BB rejected some analysts' observation that its mid-December hike in Cash Reserve Requirement (CRR) sparked the crash at the Dhaka and Chittagong Stock exchanges.
"Selling pressures that forced the price movements had little if anything to do with money market liquidity," the bank said, holding cash withdrawal by three IPOs as being mainly responsible for the sudden slump.
"Investors offloading part of existing stockholdings to raise cash for three upcoming IPO subscriptions were apparently the proximate factors behind selling pressure that triggered the price correction," it said.
In one of the three IPOs, the Mobil Jamuna Limited alone received subscriptions worth Tk 26.4 billion against the issue offer for Tk 6.1 billion, it said.
The few banks with capital market asset holdings beyond permissible limits were allowed extended periods to scale down to permitted levels gradually, and had no reason to cause abrupt selling pressure, it added.
As part of its move to curb fund diversion, the BB said it has initiated corrective and preventive supervisory steps against lending discipline lapses in banks leading to loan diversion to unauthorised uses.
It said Chief Executive Officers of the banks would be held responsible for oversight in loan utilisation -- a move mainly stemmed from BB's findings of the fund diversion.
The central bank also warned that it would sternly deal with "lapses and laxities" in banks' lending practices, eschewing forbearance.
It however, urged the regulatory regime namely the Securities and Exchange Commission (SEC) to provide sufficient safeguards against "foaming and frothing of stock prices by unscrupulous market players."
No comments:
Post a Comment