Home ›› 11 Aug 2022 ›› Front
The country’s banks and non-bank financial institutions (NFBIs) are struggling with severe and persistent liquidity shortage, triggered mainly by the ongoing volatility in the foreign exchange market.
Banks are now mostly dependent on the inter-bank money market and central bank to tackle this crisis, which in turn is putting additional pressure on the call money market.
The inter-bank call money rate – which is the interest rate on a type of short-term (overnight) bank-to-bank loan for emergency needs – hovered above 5 per cent in the last couple of months, an increase from under 3 per cent recorded in January 2022.
This rate stood at 5.49 per cent on Wednesday, compared to 2.72 per cent recorded on January 2 this year, as per data from the Bangladesh Bank (BB). Most of the banks and NBFIs are now taking liquidity support from the central bank, industry insiders say.
On July 31, thirteen banks received Tk 6,461 crore from the banking regulator as liquidity support. Just a few days later on August 2, five banks and NBFIs received Tk 3,404 crore as liquidity support.
The BB governor recently acknowledged this issue as well.
On August 4, central bank Governor Abdur Rouf Talukder had said, “The Bangladesh Bank withdrew Tk 78,000 crore from the banking sector after injecting $7.50 billion to stabilise the forex market last FY, which had put the banks under liquidity pressure.
Growing import payments key factor
Growing import payments, created by the price hike of commodities in the global market and supply chain disruption triggered by the Russia-Ukraine war, is the key reason behind the volatility in the foreign exchange market, industry insiders told The Business Post.
The letter of credit settlements – also known as actual import payment – rose by 46.15 per cent to $83.68 billion in FY22 when compared year-on-year. Meanwhile, the local currency devalued over 10 per cent against the USD due to the demand-supply gap of the American greenback.
Surplus liquidity in the banking sector stood at Tk 2,03,000 crore at the end of June of this year, down from Tk 2,31,462 crore at the same month last year, shows latest data from the Bangladesh Bank.
On the issue, Pubali Bank’s Managing Director and CEO Saiful Alam Khan Chowdhury said, “The key factors behind the tight liquidity situation in the banking sector are the depreciation of local currency against USD and the growing credit demand in the post pandemic period.
Private sector credit growth stood at 13.66 per cent in June of this year, highest in the last three years.
Chowdhury said the state-run banks were the major lenders in the call money market amid the pandemic, but they are now becoming buyers in the same market due to the liquidity shortage created by the growing import financing.
NBFIs also navigating troubled waters
Along with banks, the country’s NBFIs are also facing liquidity shortage due to the forex crisis.
Bangladesh Leasing and Finance Companies Association (BLFCA) – a forum of top executives of NBFIs – wrote to the Bangladesh Bank on July 25 to revise the interest rate cap to help them tackle the liquidity shortage.
“The NBFIs are facing a shortage of liquidity as they are not getting deposits at the 7 per cent interest rate,” BLFCA Chairman and IPDC Finance Managing Director Mominul Islam told the correspondent.
Current forex market situation
The official interbank exchange rate stood at 94.80 per USD on Wednesday as the local currency has been devalued by Tk9 or 10.11 per cent this year.
On that day, most of the banks collected remittance from foreign exchange houses at a rate of Tk 112 to Tk 114. Meanwhile, importers also spent around Tk 114 to Tk 115 per USD to pay import bills, according to bankers.
The Bangladesh Bank pumped over $1 billion into the country’s banking industry in July alone to cool down the foreign exchange market. According to the central bank data, the regulator injected a record $7.62 billion from its reserves to banks in the last fiscal year.
Due to the continued USD selling spree of the central bank, the foreign exchange reserves of Bangladesh dipped to $39.66 billion on August 3, compared to $46.15 billion recorded in December of last year.
Decline in investments feared
Commenting on the overall situation, Mercantile Bank’s Additional Managing Director Mati Ul Hasan said, “The liquidity situation in the country’s banking sector is now very tight due to several reasons, including the forex crisis.
“Liquidity or fund is the lifeblood of the banking sector, and if a bank faces liquidity shortage, it impacts other indicators of the lenders. The profitability of banks falls due to the liquidity shortage.”
Besides, when banks face a shortage of liquidity, it negatively impacts credit growth and private investments, he added.
Echoing the same, Dhaka Chamber of Commerce & Industry (DCCI) President Rizwan Rahman said, “The liquidity shortage in the banking sector will reduce private investments as businesses will not be able to get the loans they need.”
