Banks now face cash crunch 

Bangladesh registered a record Tk 20 hike in dollar price last year when its demand soared following a rise in fuel and consumer product prices in the global market. 

The high exchange rate of the dollar could not bring down its demand here, rather it swelled the demand for local currency. Many banks plunged into a cash crisis as they spent an increased amount of local currency to buy the greenback and settle the import bills. 

On the flip side, the deposit received in the banks covers only half of their lendings in the recent days. A large number of people refrained from depositing money in the banks due to the low interest rate in comparison to inflation. 

Meanwhile, the loan irregularities in five Shariah-based banks came to the fore and sparked panic among the depositors. All these issues have eventually translated into a Tk 30 billion drop in the overall bank deposit since November last year. 

Many banks are now borrowing money from others under the call money facility, even at an interest rate of 10 per cent. This call money service is also getting pricier with the rising demand. The banks could have overcome the crisis by raising the interest rate on deposits, but it will not happen as the central bank cemented the interest rate at 9 per cent. 

In the aftermath, a chaotic situation created in the liquidity management system in the banks. Some of them are now and then struggling to maintain the cash reserve ratio (CRR) in line with the central bank requirements. Janata Bank and National Bank, in addition to the five Shariah-based ones, failed to deposit a certain amount of their cash reserves in Bangladesh Bank in November and December.    

Shah Md Ahsan Habib, professor of Bangladesh Institute of Bank Management, said the current phenomenon of liquidity crisis was presumed earlier. No single decision is enough to combat the situation as it is related to the greenback. 

“Now the banks have to choose only the productive sectors for lending and also gear up the monitoring activities,” he said. 

The banks receive deposits from the people and different public and private institutions. They have to pay interest against the deposits on a regular basis. 

The banks have recently raised the interest to a highest possible level to attract more deposits. The weaker a bank and the more money it needs, the higher its interest rate. 

Some even made special arrangements to accumulate more deposits. They are receiving deposits with interest up to 8 and a half per cent. It raised a question as to how the banks are running their business providing such a high interest as they have to meet the operation cost and make profit also.

On Tuesday, the banks borrowed money from each other under the call money facility at a maximum interest of 6.78 per cent, which was 4.25 per cent a year ago. The interest on call money lending for 14 days has even gone up to 10 per cent.

According to the Bangladesh Bank data, the average interest rate on call money was 5.77 per cent on 4 January and it rose by more than 1 per cent in just a few days.

The central bank is regularly lending money to other banks under the repo facility at 5.85 per cent interest, in addition to special liquidity support in special cases. It introduced a special credit facility for the Shariah-based banks due to the recent crisis. Also, the Shariah-based banks received liquidity support under special arrangements at 8.75 per cent interest. 

The managing director of a commercial bank, on the condition of anonymity, said a crack developed in the confidence of the depositors when the central bank, instead of imposing punishment, arranged special facilities for the Shariah-based banks amid irregularities. All the banks, more or less, are now suffering from a liquidity crunch in the aftermath. The crisis-hit ones are being forced to borrow money from others at a high interest rate. 

The central bank spokesperson, Mezbaul Haque, said, “The interest on treasury bills is increasing, so the interest on all types of money lending tools is also rising - it is normal.”

He also noted that more than Tk 1000 billion has gone to the central bank vault due to increased dollar sales. It may trigger a temporary imbalance in liquidity. The banks are managing liquidity as best they can. 

However, no decision has been taken to raise the loan interest rate, he added. 

The conventional banks have to deposit 17 per cent of their cash in Bangladesh Bank as CRR (cash reserve ratio) and SLR (statutory liquidity ratio). The ratio is 9.5 per cent for the Shariah-based banks. 

The banks use the remaining deposits to disburse loans. The conventional banks are allowed to lend Tk 87 against a deposit of Tk 100 and the lending amount is Tk 92 for the Shariah-based banks. 

A total of Tk 1695.56 billion was in the banks in excess liquidity in October last year while the usable surplus was only Tk 127.43 billion. The excess liquidity was totaled at Tk 344.06 billion in October 2021 and Tk 638.54 billion in June 2021. 

The amount of cash reserve was Tk 3354.76 billion in October last year. Of the amount, Tk 219.59 billion was in the bank vaults while Tk 2361.14 billion was in the hands of the public. 

The lower the amount of cash and money outside the banks, the faster the economy of a country. But the amount of money outside the banking system is rising here. This money does not play an effective role in the economy. When money remains in the banks, it is used in investments and making new employment. 

Ahsan H Mansur, executive director of the Policy Research Institute (PRI), said no action is being taken against those who are responsible for the current situation in the banking sector. It is weakening the people’s confidence in the system and has led to a cash crunch after the dollar crisis. The problem has been in place for six months, but the government does not even consider it a problem.

“Now the culprits must be brought to book first to solve the problem. Lifting the interest rate might be a temporary solution, but the problem would return in the same form. Because the dollars have been laundered out of the country, and the money has gone out of the bank,” he added.