Liquidity management: Banks fight cash crunch now 

In addition to the dollar crisis, the country's banks are now grappling with a liquidity crunch. Consequently, the rate at which banks borrow money is rapidly increasing, and many banks are compelled to collect high-interest deposits.

Senior bankers and sector experts attribute the liquidity crunch to three factors: the erosion of the debt repayment culture due to frequent concessions and exemptions, government borrowing at high-interest rates, and the accumulation of dollars at elevated rates.

Banking sector stakeholders state that, at year-end, many business customers are withholding loan repayments in the hope of receiving discounts. Moreover, banks are facing challenges in attracting deposits as the government borrows money through high-interest bonds.

Simultaneously, banks are incurring extra expenses to purchase dollars. Two years ago, it cost Tk 85 to buy a dollar; now, the official rate is Tk 110, and in some cases, banks have to spend Tk 123. The immediate recovery of this money from customers is proving challenging for the banks.

After reviewing various financial data from the central bank and commercial banks, it has been found that the country's banks need to borrow an average of 200 billion from the Bangladesh Bank every day to address the liquidity situation.

These loans are for durations of 1, 7, and 14 days. Several well-known banks are now seeking funds from the central bank to address the shortfall in their cash reserve ratio (CRR). 

Former Bangladesh Bank Governor Salehuddin Ahmed commented on the situation, stating, “The government's low revenue collection is leading to borrowing at high interest rates through treasury bills and bonds. To address this, the government needs to reduce costs and refrain from initiating new projects."

He further said, “Government projects often act like money-making machines, leading to significant wastage. It is crucial to keep the interest rates on treasury bills and bonds lower than those on deposits. Additionally, the policy of reducing interest rates on savings certificates was a mistake. Offering loan waivers to defaulters is an unsustainable policy. Implementing these changes will help rectify the liquidity situation.”

The International Monetary Fund (IMF) recommended reforms in the sector by eliminating regulated interest rates on loans and deposits. Responding to this, Bangladesh Bank introduced new rules for setting interest rates last July, aiming to consider inflation control and the bank's liquidity situation.

The central bank adopted the new system called SMART interest rates (Six Months Moving Average Rate of Treasury Bills), scrapping the artificially fixed interest rate of 9 per cent for loans and 6 per cent for deposits.

The SMART rate, which was 7.1 per cent in June, increased to 7.72 per cent in November. Banks can add up to 3.75 per cent interest to the SMART rates, resulting in a current loan interest rate of 11.47 per cent.

Banks' Asset-Liability Committees (ALCO) determine interest rates on deposits and loans by reviewing their liquidity situation. Amid the liquidity crunch, a significant number of banks are offering up to 9 per cent interest on deposits, with some crisis-ridden banks reportedly raising funds at 12 per cent interest.

The increase in deposit interest rates has led to a higher tendency to return money kept at home to the bank. However, despite this, loan growth outpaces deposits, leading to a cash crisis in the banks.

Abdul Jabbar, the Managing Director of state-owned Janata Bank, informed Prothom Alo that there is a scarcity in the deposit in the market. Despite increased interest rates, expected amount of deposits are not being available, since many individuals are opting to invest in government bills and bonds due to attractive interest rates. Additionally, loan recovery is not progressing as expected, leading many banks to grapple with liquidity challenges.

Nevertheless, Jabbar expresses optimism that the situation will normalise in the coming days.

According to the Bangladesh Bank data, the amount of currency outside the banking system was Tk 2.91 trillion in June, decreasing to Tk 2.45 trillion in October. This reduction in cash outside the banks corresponds with an increase in deposits in banks, rising from Tk 15.95 trillion in June to Tk 16.36 trillion in October. Similarly, loans increased from Tk 15.7 trillion in June to Tk 16 trillion in October.

In October this year, there was a 9.79 per cent growth in deposits compared to the same month in the previous year. However, the growth in loans during that month was 14.36 per cent.

Despite the overall increase in deposits during the last July-October period, certain Shariah-based banks have recently faced a shortfall in their current accounts. Following discussions about this issue, the deposits of these banks experienced a setback. 

After reducing borrowing from Bangladesh Bank through printing money, the government has shifted to borrowing through treasury bills and bonds. Consequently, the interest rates for government securities have risen, with the 91-day treasury bill at 11.10 per cent, the 182-day bill at 11.20 per cent, and the 364-day bill at 11.40 per cent.

The government is securing funds at an interest rate of 11.5 per cent, which is the highest loan interest rate in banks. This trend has attracted not only banks but also corporate houses and individuals to invest in treasury bills, exacerbating the liquidity crisis in banks.

The government on Sunday borrowed Tk 15.02 billion through the 91-day bill, Tk 4.27 billion through the 182-day bill, and Tk 1.41 billion through the 364-day bill at these interest rates. 

Arif Qadri, the Managing Director of the private sector United Commercial Bank (UCB), informed Prothom Alo that the high interest rates on government loans are attracting investments from entities beyond banks. This shift does not impose additional costs on the banks, and there is no concern about retrieving the money. Consequently, the liquidity market is facing some challenges.

Qadri suggests that the central bank should implement strict monitoring of every loan, similar to the dollar market, to improve the liquidity situation, emphasising that a decrease in the government's loan interest would contribute to this improvement.

Many individuals within the banking sector have noted that a significant number of borrowers are defaulting on loan instalments intentionally, anticipating potential discounts before the parliamentary elections. Furthermore, the loan repayment culture has suffered due to concessions granted in the past three years amid the Covid-19 pandemic and economic challenges, leading to a widespread destruction of the loan repayment practice. The crisis is escalating as more than 1.5 trillion of loans are in default, and an additional amount is not being paid on time.

Bankers emphasise that the reluctance to repay loans is causing banks to struggle with liquidity management at the end of the year. Typically, each bank is assigned a specific profit target by the board of directors. Consequently, many banks are striving to demonstrate profit on paper, even if the loans are not effectively collected.

As the liquidity situation of banks deteriorates, Bangladesh Bank has increased its money lending to address the issue. This lending is done against treasury bills and bonds, primarily through the one-day repo facility, which is provided to address the Cash Reserve Ratio (CRR) shortfall.

Additionally, the central bank is offering funds for terms of 7 and 14 days in special arrangements. Furthermore, Bangladesh Bank is extending financial support to five Islamic banks facing a crisis due to a deficit in their current accounts. This assistance has been ongoing for a year to ensure the smooth functioning of the transaction system.

Recent data reveals that the central bank provided Tk 184.10 billion on Sunday, Tk 169.70 billion on Monday, Tk 194.89 billion on Tuesday, Tk 246.15 billion on Wednesday, and Tk 190 billion on Thursday. It’s important to note that lending and withdrawing money from the market are routine activities for the central bank.

Former Bangladesh Bank Governor Salehuddin Ahmed has urged the central bank to take immediate initiatives to restore confidence in the banking sector.

He emphasised that the ongoing issues in Shariah-based banks should no longer be tolerated for the gradual improvement of this sector. Ahmed stressed that failure to address these issues could adversely impact the entire economy through the banking sector.

Sources indicate that the central bank is reluctant to provide new concessions to defaulters, although trade associations have begun lobbying for exemptions. In addition to communicating with the governor, they have met with top government officials to press their demands.

Bangladesh Bank Governor Abdur Rauf Talukder, speaking at a conference of the Bangladesh Institute of Development Studies (BIDS) on 9 December, stated that despite various concessions granted over the years, defaulted loans continue to rise.

Talukder emphasised the need for strong action, with a roadmap to reduce bad loans expected to be announced soon. Loan interest has increased from 9 per cent to 11.5 per cent, prompting banks to adopt a more cautious lending approach. Furthermore, banks have been informed that discounts will not continue as before.

* The report, originally published in the print and online editions of Prothom Alo, has been rewritten in English by Farjana Liakat