Sudden liquidity crisis cripples banks

Constrained by an unforeseen liquidity crisis, the countrys commercial banks cannot disburse fresh loans to investors, bankers and businessmen say.

Almost all the banks have raised their rates of interest to collect deposits, eventually instigating a rise in lending rates.

In some cases, several banks took back the money they had lent the borrowers.

Until only a few months back, the banks disbursed loans among big borrowers at 8-9 per cent rate, which, businessmen pointed out, increased by 2-3 per cent by this time.

Interest rates of consumer loans and housing loans have also increased during the period.

A recent central bank step to bring down the ceiling for disbursing loans against the deposit, which is technically called loan-deposit ratio (LDR), is one of the key reasons behind the current liquidity crisis, according to bankers.

The fall in the banks deposits due to interest rate decline, withdrawal of cash by selling dollars, and the recent loan scam of a private bank have also contributed to deepening the crisis.

Terming the situation alarming, the president of Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) said the business community is viewing the situation with concern.

We want interest rates at a tolerable level. Otherwise, the cost of doing business will increase and commodity prices will surge. Such a situation will trigger higher inflation, he pointed out.

Double-digit interest rate

The countrys businessmen enjoyed a good time last year when the interest rate for big borrowers came down to 8 per cent. Interest rates also decreased for personal, housing, and car loans as well as the ones for professionals.

According to the central banks estimate, the average interest rate in the country ranged between 12 per cent and 14 per cent from 2011 to 2013. It came down below 10 per cent in 2017 and as of December, the average rate of interest stood at 9.35 per cent.

A number of business groups, when asked, said the banks were demanding higher rates of interest in recent times.

Until recently, we drew loans at 8.50 per cent rate or so. It has crossed 10 per cent by this time,” vice chairman of Bengal Group Jasim Uddin told Prothom Alo,

He mentioned that the interest rate for cash capital is even higher.

A businessman who is also a bank director said, “If 20 banks join the market competition for collecting deposits, it is only natural that the interest rate will increase.

Currently, according to him, the commercial banks are trying to collect more than Tk 200 billion from the market. If the rate for fixed deposit is 9 per cent, it is impossible to disburse loans at less than 14 per cent interest rate.”

President of Exporters Association of Bangladesh, Abdus Salam Murshedy, who is also a director of Premier Bank, said, “While trying to maintain a balance between credit and deposit (LDR), the banks are going extremely slow in processing fresh loans although they are disbursing already approved loans.”

BBs ceiling

In 2017, the commercial banks pursued an aggressive loan disbursement policy. As a result, their deposits declined.

The banks distributed Tk 1.11 trillion loans in 11 months of 2017, as against deposits of Tk 725 bilion they collected during the period, according to statistics available with the central bank. That means credit disbursement was more than 1.5 times higher than the deposits.

Such a mismatch, statistics suggest, created liquidity pressure for banks.

Simultaneously, the banks bought dollars from the central to pay import bills, causing rise in the price of the dollars.

And to address the dollar price issue, the central bank has withdrawn about Tk 100 billion by selling US$1.2 billion so far in the current fiscal year that began in July.

This step is believed to have helped aggravate the liquidity crisis.

The Bangladesh Bank has in the meantime, revised downwardly the ceiling for disbursement of loans against deposits in order to address the situation.

Bankers said their capacity to distribute loans has been constrained by the central bank directive. Also, they are focussing on collecting higher deposits to comply with the central banks directive.

Since there is no surplus deposits in the market, it is being transferred to one bank from another, they said.

Thus, the rates of both deposit and loan are increasing.

Again, import bills exceed export earnings and loan amouts outpace deposits, creating problem for banks in liquidity management.

The amount of deposits banks are receiving is lower than the loans being disbursed by them. This has resulted in liquidity crisis, said president of Association of Bankers, Bangladesh (ABB) Syed Mahbubur Rahman. This is also instigating interest rate growth, he added.

Zahid Hussain, chief economist at World Bank Dhaka office, said the banks have no excess liquidity, nor could not enhance realisation of default loans. Money is also being diverted elsewhere, as interest rate for savings certificates is higher. As a result, the banks are trying to collect deposits at high rates, leading to interest rates for loans, he pointe out.

In such a situation, stakeholders say, the slow credit growth will hamper expansion of trade and investment and affect economic growth. Rise in interest rates will increase costs of doing business, leaving ominous signs for the economy and growth, they added.

* This piece, originally published in Prothom Alo Bangla print edition, has been rewritten in English by Khawaza Main Uddin.