Mismanagement, mistrust cause liquidity crisis in banks

Shawkat Hossain . Dhaka | Update:

prothom alo illustrationThe country’s banking sector faces acute liquidity crisis due to mismanagement, inefficiency and wrong policies, bankers and researchers have said.

They added decisions taken bypassing the central bank and lack of trust of the common people also attribute to the crisis.

“Banks face liquidity crisis as big chunks of money are with the defaulters and deposits are not available as per demand,” chairman of the Association of Bankers Bangladesh (ABB) Syed Mahubur Rahman told Prothom Alo.

He also said many have stopped paying off the loans following an announcement that a scope will be given to pay loans on nine per cent interest rate.

Insiders in the banking sector said there is a huge crisis of cash in banks and deposits have decreased. However, banks were flooded with cash even two years ago, they lamented.

The stakeholders mentioned that there was no radical change in the economy of the country. Moreover, the growth and the per capita income increased.

Banks were not interested to keep the people’s money two year ago, they are now desperate to do so. Some banks even offer 10.5 per cent interest for bigger amounts.

Earlier, the government and the bank owners had decided that the interest for the bank loans would be nine per cent and that for deposit would be only six per cent.

The rates were lowered to lessen investment cost in the private sector and to encourage new investments. But the rate of all types of interest is now increasing.

According to the Bangladesh Bank, the amount of deposit in the banks has increased by Tk 408.35 billion and the loans have increased by Tk 679.74 billion.

Till last March, it was seen that nine or ten banks had funds worthy of investment. The rest of the banks were running small scale investment activities borrowing funds.

Among the total deposit of the country, 28 per cent is with six government commercial banks and the rest of the 72 per cent is with private banks.

The rate of loan is 67 per cent of the deposit with the government banks while it is 87 per cent for the private banks.

The limit of disbursement of loan is up to 83.5 per cent.

The rate of loan is 110 and 113 per cent for Basic bank and Padma Bank respectively. Moreover, ten banks have granted loans over 90 per cent of the deposit. This has decreased the capacity of granting loans by the most of the private banks.

A large portion of the bank loans flows to Chattogram. The president of the Chittagong Chamber of Commerce and Industry, Mahbubul Alam, said cash has decreased in the banks and the rates of interest have also increased, up to 13 per cent now. The rate of interest should be decreased to help the business sector, he observed.

Cause of deterioration

Since the 80s, banking sector of the country has undergone many ups and downs. A number of reformation programmes were undertaken as per the advice of the donors and they funded the activities too.

Several commissions and committees were formed and banks were operated according to international rules. This helped to improve the overall situation, but for over a decade vigilance was slack, big scams took place and amount of default loans rose. Also, many decisions were taken ignoring the central bank.

In 2011, the Hallmark scam was the first major shock in the last decade. The biggest bank of the country, Sonali Bank, became conservative in granting loans following the incident. A series of scams took place with Basic Bank and Janata Bank too. Despite this, many banks granted loans defying rules.

The 2018 Farmers Bank scam was the latest in these. This bank granted loans crossing the proportion of deposit. Later, it failed to return the deposit of the clients. Several persons and institutions began withdrawing deposit from the bank and this affected other banks too. Their deposit began decreasing due to the clients’ lack of trust.

The former governor of Bangladesh Bank, Saleh Uddin Ahmed, told Prothom Alo, the prevailing crises in the banking sector did not occur in one day. Businessmen and vested quarters have been defying rules. The problems are known to all, what is required is visible measures, he said adding that, no one involved in the irregularities were punished. If the prevailing condition is allowed to go on, the situation will not improve, he added.

Other factors contributing to the liquidity crisis

The income of the bank has decreased, too. The income from export and remittance has not increased in comparison to the import expenditure. Import expenditure was $ 37.83 billion in July-February of the current fiscal. A total of $ 8.86 billion was spent in service, loan and paying off interest. Over the same period, remittance was $ 11.86 billion and export earning was $ 30.9 billion. This has caused a business deficit of $ 1.69 billion.

In 2017-18, the export cost increased by 25 per cent. Debenture worth $ 20 billion was opened to import the machineries of Ruppur Nuclear Power Plant. It caused crisis of dollars and its value rose from Tk 80 (July) to Tk 84 (now).

The supply of dollars is still less than demand. The banks bought $ 1.87 billion from the central bank between July 2018 and March 2019 while Tk 158.95 billion has flown to the central bank. This has intensified the liquidity crisis.

A large section of the raw materials and people’s commodities are to be imported. The rise of dollar price increases the price of these essentials. So the cost of living rises, too. Inflation is on the rise since the onset of the current fiscal.

Amid this, the government has announced to offer new concessions for the loan defaulters. The defaulters can renew loans at nine per cent interest. The decision has affected the banks’ loan appropriation programmes.

A big entrepreneur told Prothom Alo that he was willingly delaying to pay his installments for a loan taken by his group of industries as a loan defaulter enjoyed more privileges than a regular one to pay off the loans at less interest.

Another crucial factor for the liquidity crisis is lack of trust. Though the government has taken several measures to address this, it did not work. On 1 April last year, holding a meeting with the businessmen, the government took a decision to decrease the rate of CRR (Cash Reserve Ratio) to 5.5 per cent from 4.5 per cent. The government organisations were allowed to deposit 50 per cent of their funds with the private banks which was previously 25 per cent.

Despite the effort, deposit was less than demand in the banking sector. The clients are now investing money on national saving certificates. Given the higher rate of profit, saving certificate has proved to be a secure investment. The government had planned to procure Tk 261.97 billion selling the saving certificates, but it grossed Tk 610.12 billion exceeding the target.

In the last ten years, private investment as part of the GDP has increased by only one per cent. Employment has not increased due to poor investment. Many researchers have termed the growth as an ‘employment-less one’.  Investment is crucial now, but the weak banking sector, liquidity crisis and high rates of interest have decreased the scopes for investment more.

Availability of fuel, especially of gas, is crucial for an entrepreneur, said former Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) president Mir Nasir Hossain. Though there have been much talks over the issue, the expectation was not fulfilled, he said. It took a long time for the compressed natural gas and supply of standard and uninterrupted power has not been ensured yet either. The question of bank loans arises once these are fulfilled, he observed.

But the banking sector is in chaos and there is lack of accountability too. On top of that, default loan and rate of interest have increased due to numerous financial scams, he said. The government is setting up economic zones and it wants to decrease the cost of business too, but if the fuel and banking sector problems are not addressed, investment will not increase as per the expectation, he added.

*This piece, originally published in Prothom Alo print edition, has been rewritten in English by Rabiul Islam and Nusrat Nowrin.

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