Banks on brink of a major liquidity crunch

Banking system in Bangladesh seems on the brink of a major liquidity crunch following regulatory credit squeeze, bankers feel.

The central bank has tightened its fist on money supply to help rein in defiant inflation.

The Bangladesh bank has gone for credit-squeezing steps to bring down inflation below 8.0 per cent by December, as high prices compound consumer woes.

The fear of such credit shortfall comes at a time when the banking industry is passing through tough times because of factors like NPL (non-performing loan) buildup, import restrictions amid prevailing forex dearth and fall in earnings from remittance and exports.

Under such circumstances, Bangladesh Bank as part of its inflation-checking interventions very recently took some money- controlling measures like increasing the policy rate by 75 basis points to 7.25 per cent, stopping injections of 'high-powered money' into the economy and curtailing liquidity support to the banks that have started putting more pressures on the excess liquidity in the banking sector.

Simultaneously, the banks need to spend a significant portion of their liquidity to buy the US dollar from the country's foreign- currency reserves managed by the BB to meet their foreign- currency obligations amid prevailing forex dearth that puts extreme pressure on the banks' liquidity, according to them.

Even, BB governor Abdur Rouf Talukder, in a meeting with the top executives of commercial banks on Wednesday, alerted them about the looming liquidity hardship in the banking sector and asked them to take necessary measures required for overcoming the situation.

Talking to the FE correspondent, BB spokesperson Md Mezbaul Haque said the governor held a meeting with Association of Bankers, Bangladesh (ABB) representatives where the governor updated the market players about the liquidity crunch.

"The governor also alerts the bankers of taking precautionary measures to overcome the looming liquidity crunch," he said.

Meeting sources said other burning issues like NPL buildup, forex dearth and exchange rate-related volatility came up in the meeting where the BB governor asked the bankers to pay more attention on asset recovery, steps to bring more remittance and export proceeds.

Seeking anonymity, another BB official said the central bank wants to bring down inflationary pressure below 8.0 per cent by the end of this calendar year. To achieve the target, the BB recently raised the policy rate by 75 per cent to make the credit costly which immediately impacts other rates like call- money rate and rates in government securities.

The official said the growing rate in government securities will certainly help achieve the target through reducing the availability of credits on the money market.

The higher rate will attract the commercial lenders to stake their money on the treasury instruments which will help reduce the volume of excess liquidity in the banks. On the other hand, people and institutions having funds will also feel encouraged to invest in government securities to reap comparatively higher gains in this critical period of time when there are not many viable investment options.

"If people or institutions don't have enough money to spend, they will not. So consumption demand will be lessened and it will help reduce the inflation rate," the central banker says, further explaining arithmetic that it will also put pressure on the banks to raise the deposit rate further to generate funds.

According to the BB statistics, the excess liquidity in the banking sector dropped to Tk 1.74 trillion in August 2023 from Tk 2.0 trillion recorded in June 2022.

When contacted, managing director and chief executive officer of Pubali Bank Limited Mohammad Ali said the central bank as part of the inflation-containing move is not going for devolvement instrument through which the BB has been meeting major share of government bank-borrowing requirement in recent months.

Now, the commercial banks will have to meet the government's bank- borrowing appetite while the rate in government securities through which the government borrowed credits from the banks continues growing, he said.

"So, the banks are interested more to invest in the risk-free investment instrument. I think the liquidity situation in banks will be in severe stress in coming days," the experienced banker said, adding that the call- money rate is also rising fast. So, getting credits has become extremely difficult.

Official statistics showed that the call-money rate reached 7.72 per cent as on October 18, 2023 from 6.60 per cent recorded on the first day of this month.

Managing Director and CEO of Mutual Trust Bank Limited (MTB) Syed Mahbubur Rahman also says banks would invest more in government securities as this is more secure and effective return is higher, which will reduce lending capacity of the banks.

Also, because of higher returns, institutional and individual investors have already started diverting their funds into the government treasury instruments. At the same time, banks have to buy dollars from BB to meet their import liabilities.

"So, liquidity will be a serious issue in the banking sector in coming days," the banker forecasts.

The senior banker cites an apparent paradox in current banking regime -- that the rate on deposits in banks keeps adjusting upwards on a daily basis while the lending rate cannot be adjusted for six months once it is pegged.

"So, the pressure on the banks' profitability will continue, which is happening at a time when banks' earnings from trade is fast getting reduced."

Managing Director and CEO of Dhaka Bank Emranul Huq notes that the country's macroeconomic situation is going through a challenging period of time because of multiple factors like prevailing global macroeconomic tightness, forex dearth and import restrictions.

On the other hand, the rate of inflation could not be brought down to tolerable level yet. "That's why the conservative approach of the central bank comes, which is a right policy under the current circumstance," he says.

The bank's top executive feels that the banks need to adopt innovative ways of banking operations under such stress scenario in the way they did during Covid period.

"I personally think banks should pay more focus on recovery of the growing bad loans, which is the major challenge for the industry," Mr Huq suggests about the sore point in the country's banking system--trillions of taka trapped in NPL.

The volume of NPL reached a record high of Tk 1.56 trillion until June 2023, which is 10.11 per cent of the total loans in the banking industry, according to the BB data. Economists, however, guess the figure could run into trillion inclusive of write-offs and rescheduling.

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