a year ago

Liquidity crunch in banks begins easing

Pumping funds into money market with BB instruments pays

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Liquidity crunch in Bangladesh's banking system shows signs of improvement as key indicators are showing positive signs, largely following monetary interventions, officials and bankers said.

Such a tangible turnaround is giving a little respite to the country's financial sector that has been passing through tough times because of panic withdrawal of money riding on rumours of severe liquidity shortfalls. Rumours stemmed from alleged massive-scale loan forgeries in some banks, apart from the global crisis caused by pandemic and war.

After those unwarranted developments, the rate of treasury bills, inter-bank repo rate and call-money rate were moving up. But, in recent days, these overheated barometers are showing a downturn.

According to Bangladesh Bank data, the average rate of treasury bills in January was 7.34 per cent. Starting from this month, it is going down to reach 6.84 per cent as of February 12.

The interbank repo rate overheated to 7.45 per cent on January 24 last but now it declined to 6.42 per cent, as of February 12, while the call- money rate dropped to 6.09 per cent last Sunday from 7.0 per cent recorded on January 25, 2023.

"These key indicators are, now, showing positive signs after days of concern and it shows that the liquidity situation in the banking system has started improving," said a BB official.

The official said those who got panicked and withdrew their money from banks riding on canards over liquidity crisis returned to the banking system with their funds.

Contacted, Managing Director (MD) and Chief Executive Officer (CEO) of Social Islami Bank Limited (SIBL) Zafar Alam said the rumour spread by a group of people about the so-called liquidity shortfall in banks has started fading out as the flow of people to the banks is in a rising trend.

Some 0.6 million (600,000) people opened accounts with the SIBL last year. In January 2023 alone, around 0.1 million (100,000) people opened SIBL accounts. "It shows people have become bank-oriented again, which is a good sign," he added.

Talking to The Financial Express on this major issue of the country's financial situation, MD and CEO of Mutual Trust Bank (MTB) Limited Syed Mahbubur Rahman also said the liquidity situation improved slightly banking on multiple factors, including bank's cautious lending policy, significant drop in the opening of LCs and loan-related activities.

"As a result, the private-sector-credit growth is falling, which is not a good sign for the banking sector in the long run," he said.

If the flow of formal credits into the private sector is not growing, the industrial production coupled with the employment situation will severely be affected, Mr Rahman said, on a note of caution.

"We need to wait further to better understand the situation," he added.

Seeking anonymity, a top bank executive said the central bank in recent days is releasing substantial volume of funds in the market using the Repo mechanism that helps improve the liquidity situation.

Earlier, BB did not allow all to get funds through repo but now the central bank allows all who apply for repo funds. Simultaneously, the BB injects credits into the market by buying government securities, the executive said.

On the other hand, the volume of ALS (assured liquidity support) to PDs (primary dealers) continues to grow. "As a result, the liquidity situation looks better now. We think that the BB wants to improve the liquidity situation."

According to the data, the growth in private-sector credits dropped to 12.4 per cent in December 2022 from 13.97 per cent in the previous month.

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