Photo : Messenger
Most banks in Bangladesh are facing a liquidity crisis due to a foreign exchange shortage, slow deposit growth, and a sluggish pace of loan recovery. Consequently, banks are struggling to carry out their regular banking activities.
Moreover, this situation is compelling banks to resort to the call money market, a short-term money market through which crisis-hit banks can borrow from others.
Experts in the banking sector believe that this predicament has arisen from various factors, including the sluggish growth of deposits, weak loan recovery, and the purchase of dollars from the Bangladesh Bank to settle import bills.
Deposit growth decelerated to 8.40 percent in FY 2022-23 from 8.90 percent in the previous fiscal year. Simultaneously, non-performing loans in banks increased, diminishing their lending capacity. Bankers mention that a portion of loans has transformed into forced loans due to the inability to repay them on time.
According to the central bank, in the first three months of the current fiscal year 2023-24, state-owned banks sold $3.75 billion from reserves. This implies that, due to these dollar sales, approximately Tk 41,000 crore has flowed into the central bank, putting pressure on banks' liquidity.
Furthermore, the government borrowed Tk 25,709 crore from banks through bonds and treasury bills, while repaying Tk 29,487 crore to the central bank during July-September. In essence, the government is borrowing from commercial banks to settle its central bank debt, thereby reducing the overall money supply.
Taking into account dollar sales from reserves and government borrowing from commercial banks in the current financial year, approximately Tk 67,000 crore has flowed into the central bank’s vaults from the country’s money supply in three months.
In addition to this, due to heightened liquidity stress in banks, the call money rate—known as the overnight lending interest rate from one commercial bank to another—has increased more than before. The average interest rate for a one-day loan on Wednesday was 7.99 percent, according to the Bangladesh Bank.
Syed Mahbubur Rahman, the managing director of Mutual Trust Bank, told the Daily Messenger, “Liquidity stress has intensified in banks. One reason for this is that the central bank aims to control inflation by adopting a contractionary monetary policy.”
Bankers have said that post-COVID-19, Bangladesh Bank offered a special discount on loan repayment, citing various crises such as the Russia-Ukraine war and the state of the global economy. Exploiting this, many significant borrowers are increasing their loans each year but not repaying the funds. Some have illicitly transferred money abroad by obtaining loans and engaging in looting through political influence and forgery. Consequently, money is not returning to the banks at the same rate it is leaving.
Moreover, a considerable number of people are refraining from keeping money in the bank due to the current lower interest rates on deposits, which are now lower than inflation. Consequently, there is a significant shortfall in cash flow, leading to a liquidity crisis. Consequently, banks are compelled to borrow money from each other to meet the daily demand for funds, including customer deposit refunds.
Ahsan H Mansur, the executive director of the Policy Research Institute (PRI), told the Daily Messenger that the bank is currently facing a shortage of funds, compelling them to rely on external liquidity by borrowing from other banks at high interest rates. In addition to this, some banks that were already weakened are also imposing elevated interest rates.
He said, “If there were no limits on interest rates, they would have increased even further. However, in this time of inflation, it is crucial to maintain control over the currency market and provide discounts on the exchange rate.”
According to the Central Bank, loans are offered for various tenors in call money, ranging from 91 days to 1 day, with a majority of loans being transacted within a day.
Based on data from the Bangladesh Bank, as of the end of October in the current financial year, the government's debt in the banking sector has surged to Tk 3,93,430 crore, compared to Tk 2,89,689 crore during the same period last year. This indicates an increase of Tk 1,03,741 crore in the government's debt within the banking sector during this period.
When asked about this, Zahid Hussain, the former chief economist of the World Bank’s Dhaka office, said, “The liquidity crisis in the banking sector has intensified due to irregularities in loans, an increase in defaults, and high inflation. Banks are struggling to meet the growing demand.”
“As a result, many banks are resorting to loans from the central bank at high interest rates. While the Bangladesh Bank is providing 100 percent liquidity support to maintain customer trust, it may appear beneficial in the short term but will likely have a negative impact on the bank’s long-term viability,” he added further.
Messenger/Disha
