Banks in Bangladesh are facing a liquidity shortage that has hindered their daily transactions. They are struggling to secure funds from the call money market at desired levels. To tackle this issue, the Bangladesh Bank (BB) has intervened by offering overnight loans to banks.
According to statements from the central bank, it provided support amounting to around Tk 31,000 crore between July 14 and July 15 to ease liquidity crunch.
Bankers inform a prolonged liquidity crisis exacerbated by recent nationwide shutdowns, curfews, and internet service suspensions aimed at quelling violence and arson attacks by unknown assailants using the quota reform movement as cover.
Additionally, the central bank took a contractionary monetary policy to reduce market liquidity in response to rising inflation, worsening the ongoing crisis within the banking sector.
Data from Bangladesh Bank (BB) shows that banks borrowed a total of Tk 30,754 crore from the central bank to alleviate the liquidity shortfall. Of this amount, Tk 11,563 crore was borrowed on July 14, followed by Tk 19,191 crore on July 15.
The quota reform movement, coupled with nationwide violence, arson attacks by unknown assailants, and curfews, restricted movement and reduced demand for cash. Banking transactions were halted from July 21 to July 23 due to a government holiday. Banks partially reopened on Wednesday but faced challenges with slow internet speeds, preventing clients from withdrawing funds as needed.
Sources indicate several banks relied on borrowing from the call money market to manage liquidity pressures. Amid the crisis, these banks increasingly sought loans from Bangladesh Bank.
Speaking anonymously, bankers disclosed details about the liquidity crisis, alleging certain bank directors took loans anonymously without repaying them. Moreover, these loans were not reported as defaults, with the income recorded as profit.
They indicated ongoing gas and financial crises hindering factory owners from operating at full capacity, reducing production. Additionally, businesses are also facing dollar crises, preventing them from importing essential raw materials, while needing to cover employee salaries, utility bills, and rent payments.
Amid rising inflation, many depositors are withdrawing their savings, decreasing cash inflows and increasing outflows. This trend significantly impacted banks' fund management capabilities, exacerbating liquidity crises for some institutions.
The decline in deposits, coupled with heightened cash withdrawal demands, created the financial strain in banks. As a result, several banks began borrowing from Bangladesh Bank to mitigate liquidity pressures and meet increased cash demands.
Prominent economist and Executive Director of the Policy Research Institute (PRI), Ahsan H Mansur, recently revealed discrepancies in reported financial figures. He stated while Bangladesh Bank reports non-performing loans (NPLs) at 11 per cent, the actual figure is 25 per cent.
At an Economic Reporters' Forum (ERF) dialogue on July 13, the economist pointed out banks show profits by considering interest from loans as income without actually collecting the loans.
“They are also distributing dividends from these so-called profits, while the government collects taxes on them. In reality, the banks are not making any income; they are essentially consuming depositors' money,” he remarked.
Ahsan accused influential groups of embezzling deposit funds aided by government support, leading to turmoil in the financial sector.
He emphasised the urgent need for a thorough cleanup of the financial sector, criticizing attempts to conceal banking sector issues as hiding “smelly dirt under the carpet”.
"Does this truly eliminate the stench? No, it will return," he said, stressing persistent challenges posed by bad loans, irregularities, corruption, and money laundering within banks.
Ahsan called for decisive government action to address these issues and initiate comprehensive financial sector reforms.
“Massive reforms in the banking sector are urgently needed considering the national interest and these reforms should be done by the government,” he added.
