Are banks heading towards severe cash crunch?

There are troubled waters ahead of the country’s banking industry, as a dozen local banks are now grappling with severe liquidity crunch amid fears of a global recession, which has cast a shadow of concern throughout this sector.

The inter-bank call money rate – a special rate only used by financial institutions to borrow and lend money – is near 9 per cent, while excess liquidity continues to fall in recent months, hitting Tk 1,46,728 crore at the end of December last year.

Surplus funds in the banking industry hit an all-time high of Tk 2,31,711 crore at the end of June 2021. But this figure has been on a steady decline ever since. In December last year, the private credit growth rate stood at 12.8 per cent, down from 13.97 per cent in November.

Meanwhile, deposits grew at only 5.6 per cent in December 2022. This growth was 14 per cent if compared year-on-year. Bankers say such trends are concerning, as those indicate that the sector could face a fund crunch triggered by the forex crisis and a lack of trust in the industry.

Seeking anonymity, a senior official at the central bank said, “Five Shariah-based banks, five private conventional and two state-run banks are now facing severe liquidity crisis. The regulator fined the Shariah-based banks for failing to maintain enough CRR (cash reserve ratio).

“Along with the call money market, crisis hit lenders are coming to the central bank every day to cover their liquidity shortage. Despite an increase in the repo rate, banks are taking liquidity support from the regulator as the money market is in a tight situation.”

Last Sunday, banks took Tk 3,500 crore from the central bank through 91-day and 364-day treasury bills. The same day, eight banks and one financial institution took at Tk 2,555.60 crore under a 7-day repo facility and six banks took at Tk 2,008.90 crore under 1-day liquidity facility.

Why is there a liquidity crunch?

Commenting on the issue, Dhaka Bank Managing Director and CEO Emranul Huq said, “The banking sector is now facing a liquidity shortage because of the forex crisis. Lenders now need to pay more to buy USD for settling letters of credit (LCs).

“The heavy burden of import payments is a key reason behind the pressure on the forex market. Along with the state-run banks, private commercial banks are also taking USD support from the regulator to meet their greenback shortage.”

Banks started to take USD support from the central bank in August 2021. Throughout 2022, the central bank withdrew Tk 1,30,000 crore from the banking sector against providing nearly $13 billion to the market, central bank sources say.

A chief executive of a leading private bank, on condition of anonymity, said, “The banking industry was vulnerable during last November, because some banks – including the Islami Bank Bangladesh – suffered a big pressure of deposit withdrawals as loan irregularities came to light.

“The deposit withdrawal pressure severely impacted the sector.”

Mobilising depositors’ funds to be costlier

The deposit growth in banks slowed to 9.35 per cent in FY22, a significant drop from 13.8 per cent in FY21, show BB data. Industry insiders say the growth has fallen mainly due to the low returns from deposit products and skyrocketing inflation.

Pubali Bank Managing Director and CEO Mohammad Ali said, “The expenditure of savers has now increased due to the growing inflation. As a result, they are unable to save money.”

Bangladesh’s overall inflation was 7.56 per cent in June, 7.48 per cent in July, 9.5 per cent in August, and 9.1 per cent in September this year. The overall inflation rates recorded in August and September are both eleven-year high figures, shows Bangladesh Bureau of Statistics data.

However, the inflation fell to 8.71 in December last year.

In the new monetary policy unveiled on January 15, the Bangladesh Bank removed the specific deposit floor rate that was imposed in August 2021. At that time, the central bank had asked banks not to set interest rates on fixed-term deposits below the inflation rate.

“Fund mobilisation from the depositors would become costlier due to the move,” said Mutual Trust bank Managing Director Syed Mahbubur Rahman.

BB’s monetary policy stance

Amid the tight liquidity situation in the banking industry, the central bank in its latest monetary policy increased the policy rate (repo rate) by 25 basis points to 6 per cent, aiming to tackle the inflationary pressure.

Agrani Bank Chairman, and also a former researcher of Bangladesh Institute of Development Studies, Zaid Bakht said, “Banks are already in a liquidity crisis while the call money rate has also gone up.

“Under the circumstances, banks will face more trouble because of the hiked repo rate.”

BB initiatives to curb liquidity crisis

Economists claimed that the central bank did not take any effective measures in its monetary policy statement to mitigate the ongoing liquidity crisis.

While unveiling the monetary policy statement on January 15, the central bank Governor Abdur Rouf Talukder said he is aware about the liquidity shortage in this sector.

“The regulator is injecting liquidity in the banking industry through several refinance schemes with low interest rates,” he added.

The central bank has already created a Tk 62,000 crore refinance scheme for large, medium, small and export oriented industries, and the agriculture sector. It also has plans to create a few more refinance schemes to cover the ongoing liquidity shortage, BB officials say.