The government’s move to ease cash reserve ratio (CRR) for banks and to keep 50 percent of its deposits in private banks will tackle the liquidity crisis and cause the interest rate to come down, say analysts.

However, banks should emphasise on sound investment before disbursing loans, according to them.

“Relaxing the CRR by one percentage point and increasing government deposits will enable extra funds, which the banks need to invest in sound avenues,” former Bangladesh Bank governor Atiur Rahman told Bangla Tribune.

Also called reserve requirement, CRR is the minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank.

“The banking sector will benefit from easing the CRR, but the way it was done was not appropriate,” said M Mahfuzur Rahman, a former executive director of the Bangladesh Bank.

The decisions were made after a meeting involving the government, the central bank and representatives from private banks on Sunday, when it was concluded the move would allow an additional funds of Tk 100 billion.

Finance Minister AMA Muhith, Secretaries to the finance ministry Md Muslim Chowdhury and Md Younusur Rahman, Governor Fazle Kabir, Deputy Governor SM Moniruzzaman, Adviser to Bangladesh Bank SK Sur Chowdhury took part in the meeting with representatives from Bangladesh Association of Banks (BAB).

After the meeting at a Dhaka hotel, Muhith announced the decisions while speaking to the media.

“Half of government money can be kept at the private banks… We’ve decided to cut by 1 percentage point the 6.5 percent cash reserves the banks need to keep," he said before adding that the moves were aimed to bring down the interest rates to single digit.

The government have been keeping 25 percent of its deposits with the private banks while the remaining 75 percent with state-run banks. But now the fraction for private banks has been raised to 50 percent.

The announcements boosted investors’ confidence as the stock markets have bounced back from the bearish trend.

BAB President and EXIM Bank Chairman Nazrul Islam Mazumder the moves will address the liquidity crisis leading to a decrease in interest rate.

“The funds kept with central bank as CRR has not benefited the Bangladesh Bank. It even did not play any role to inflation,” he added.

The government, however, will review its decision to ease CRR after two months.

“We will review it in June … If we find it’s effective, then fine. Otherwise, more measures will be taken,” Muhith said on Sunday.

Inflation goes up when supply of money increases, but the finance minister assured that would be not the case. “No, not at all,” is what he said replying to a query from reporters.

BAB President Mazumder echoed saying, “The additional funds enabled by relaxing the CRR will not hike inflation.”

Meanwhile the government has also decided to extend the time for banks to adjust the advanced-to-deposit ratio (ADR), which measure loans as the percentage of deposit.

On Jan 30, the Bangladesh Bank lowered the ceiling for ADR by 1.5 percentage points to 83.5 percent to curb aggressive lending.

The central bank had said banks must adjust the ratio gradually by June 30.

On Feb 21, it was stretched by six months to Dec 31, which officials said was to give the banks the opportunity to rein in an aggressive drive of the collection of deposits by offering high interest rates.

The Bangladesh Bank has now decided to stretch the deadline further to Mar 31, 2019.