Severity of liquidity crisis may increase in pvt sector banks

82 pc of deposits to be used for govt loans

Mahfuja Mukul: The growth of deposits in the country’s banking sector is now around 10 percent. If this trend of growth continues, deposits in banks may increase to a maximum of Tk 1 lakh 67 thousand 604 crores in the next financial year. The government has announced a target of taking a loan of Tk 1 lakh 37 thousand 500 crore from this deposit. In that case, 82 percent of the bank’s new deposits will go to the government sector. And less than 18 percent will go to the private sector. Although the contribution of the private sector to the country’s economy is 86 percent. And the share of public sector is only 14 percent.
Economists and entrepreneurs say that the private sector is already suffering from liquidity crisis. Many industries are closing due to lack of working capital as per demand. The amount of defaulted loans is also increasing. The avenues for new investment and job creation have narrowed. Liquidity crisis is going on in the capital market of the country. In this situation, if the amount of borrowing announced by the government in 2024-25 financial year is implemented, the private sector will be in a more fragile situation.
In the current financial year 2023-24, the government could not fund foreign loans as expected. Again, the revenue target was not met. Due to this, the government has become more dependent on bank loans to meet the deficit budget. In the budget of the current financial year, the target of borrowing from banks was Tk 1 lakh 32 thousand 395 crores. But in the last month of the fiscal year, this target was increased to Tk 1 lakh 55 thousand 935 crores in the revised budget. According to the data of Bangladesh Bank, in the first nine months of the current financial year (July-March), deposits in the bank sector of the country have increased by Tk 80,792 crores. At the end of March, the balance of deposits in the bank sector stood at Tk 16 lakh 76 thousand 46 crores. In this case, the annual growth of deposits was 9.98 percent. That is, the government is now borrowing from the banking sector more than the growth in deposits.
According to the target announced by the government, if the private sector takes a loan from the bank, the economist thinks that the private sector will not get anything said Ahsan H. Mansoor. He told, “In the proposed budget, the government has said to increase investment in the private sector. But there is no explanation as to how or from what source that investment will be raised. We see that the growth of deposits in the country’s bank sector is quite slow. In the next financial year, deposits in banks may increase to a maximum of Tk 1 lakh 70 thousand crore. If the government takes a loan of Tk 1 lakh 37 thousand 500 crore from there, then what is left? The private sector will be more affected by the liquidity crisis.
He said, “In the country’s economy, the size of the private sector is 86 percent; The remaining 14 percent is government. But in terms of borrowing, we are seeing the opposite situation. The government is now taking short-term loans from banks at 12 percent interest. But the policy interest rate of the central bank is 8 and a half percent. Government is now the biggest consumer of banks. There is no need for the bank to give loans to individuals now.
The data of Bangladesh Bank also shows the decrease in the flow of credit to the private sector. According to the Central Bank’s statistics, the credit growth of banks was only 1.49 percent in the last January-March quarter. But during the same period the growth of investment in government treasury bills and bonds was more than 11.40 percent. Overall, the annual credit growth in the country’s private sector till April was 9.90 percent. But at the same time, the growth of public sector loans has been 16.89 percent.
Loan growth has been higher than deposits in the country for several years. Most of the country’s banks are suffering from liquidity crisis due to non-receipt of deposits as expected. This crisis, which has been going on for almost three years, has now become more intense. Most of the banks are taking short-term loans from Bangladesh Bank through various means including repos to meet daily transactions. Most of that loan taken at 8.5 percent interest is again being used to lend to the government by buying treasury bills. In that case banks are getting 3 percent interest margin without any risk or effort. Meanwhile, the interest rate on treasury bills has gone up to 12 percent. And Treasury bond interest rate has risen to around 13 percent. The government aims to borrow Tk 61,700 crore from the bank sector through treasury bills and bonds in this June alone. However, the banking sector does not have the capacity to provide this amount of loans. Due to this, the interest rate of treasury bill-bonds is likely to increase by 1-2 percent. In this, compared to the private sector, the banks will be more inclined to give loans to the government, said those concerned.
However, the demand for loans in the private sector is less now, said Syed Mahbubur Rahman, Managing Director of Mutual Trust Bank (MTB). He told, “Economic activities have decreased in the country. Due to this reason, loans cannot be increased in the private sector. There is not much new investment in the private sector due to various reasons including dollar crisis, global instability. Again, there is a liquidity crisis in the banks. For this reason, we are taking loan from Bangladesh Bank on repo at 8.5 percent interest. A large part of it is used for lending to the government. If the government increases its borrowing, the repo borrowing will also increase. And the private sector will be under more pressure.
The government’s dependence on the bank sector to meet the deficit budget is increasing. Interest rates are also increasing along with the trend of government borrowing. Even two years ago, the interest rate on 91-day government treasury bills was less than 2.5 percent. The interest rate of this short-term loan is now 11.65 percent. If the term is longer, the government has to charge more interest to take the loan. Banks now find it more profitable to lend to the government than to the private sector.
According to the data of Bangladesh Bank, the average interest rate of 91-day treasury bills in December 2021 was 2.36 percent. In this June, it increased continuously and reached 11.65 percent. Accordingly, the interest rate of the bill with the shortest term has increased by 393 percent or almost five times. The interest rate on 182-day Treasury Bills increased by more than 260 percent. In December 2021, the average interest rate on six-month treasury bills was 3.19 percent. This month it has increased to 11.80 percent. The interest rate on one year or 364 days Treasury Bills increased by 249 percent. In December 2021, the interest rate of the highest term bill was 3.44 percent, but now it has increased to 12 percent.
Along with the yield rate or interest rate, the debt position of the government using treasury bills has also increased more than three times. According to the data of the central bank, the debt status of the government taken through the treasury bill in December 2021 was Tk 62,150 crore. At the end of December 2023, the debt status stood at Tk 1 lakh 36 thousand 210 crores. After that, the amount of the government’s debt has not been disclosed by the central bank. Even after contacting several concerned parties, no information was received in this regard.
According to the data of Bangladesh Bank, the amount of debt taken by the government through treasury bills and bonds in January this year was Tk 26,223 crores. The loan amount taken in February stood at Tk 33,452 crores. The government took a loan of Tk 36,639 crores in March and Tk 35,817 crores in April. In the last month of May, the government took a loan of Tk 33,560 crore through treasury bills and bonds. Out of this, Tk 25,720 crores are taken through treasury bills. The remaining Tk 7,840 crore has been taken through bonds. The government paid off the debt of Bangladesh Bank with a part of the loan taken from the commercial banks.
President of Metropolitan Chamber of Commerce and Industry (MCCI) Kamran T Rahman thinks that the government’s tendency to take loans may create a ‘crowding out’ situation in the economy. He said, “If the target amount of borrowing from the bank sector announced by the government is implemented, there will be a shortage of money for the private sector investors. In the meantime, the bank loan interest rate has gone up to 15 percent. If the government increases borrowing, the interest rate of bank loans will increase. This will affect investment and trade.
Bank loan interest rates were completely left to the market on May 8 as part of meeting the conditions for receiving loans from the International Monetary Fund (IMF). Before this, Bangladesh Bank adopted the policy of increasing the loan interest rate from the beginning of the current financial year. At that time, the maximum interest rate limit of 9 percent of loans was lifted to control inflation. Six Months Moving Average Rate of Treasury Bills or ‘SMART’ method was introduced by the central bank to determine the interest rate of the loan. Even after the introduction of this somewhat controlled system, the loan interest rate increased from a maximum of 9 to 13.55 percent in just nine months. After letting the market, many banks have increased the loan interest rate to 15 to 17 percent.
In addition to leaving the interest rate of the loan to the market, Bangladesh Bank introduced the ‘crawling peg’ policy to determine the exchange rate of the dollar on the same day. This resulted in a 6.36 percent devaluation of the rupee against the dollar in one day. The intermediate rate of the US dollar is fixed at Tk 117 by the central bank. Although at the beginning of that day, the exchange rate per dollar was fixed at Tk 110. Accordingly, the dollar exchange rate has been officially increased by Tk 7 in one day. However, it was announced by the central bank that the banks can sell dollars at a higher or lower price than this.
Taking into account the current declared rate of the dollar, the rupee has depreciated by about 40 percent in the last two years. Every dollar is trading at Tk 118 in the formal sector, increasing from Tk 84. The impact of this record depreciation of the taka has caused the prices of every import-dependent product to rise at an abnormal rate. At the same time, the cost of doing business has also increased.
Businesses of all sectors – large, medium or small – are increasingly worried about the increased interest. At the same time overdue loans are increasing in the banking sector. Bank executives say that many good customers are unable to repay the loan installments due to the pressure of increased interest. Businessmen said that they can no longer bear the pressure of interest rate increase. Gas and electricity bills have doubled. Operating expenses, including salaries and allowances of employees, have increased by about 30 percent to cope with inflationary pressures. In this situation, many businesses are closing due to doubling of loan interest rates. If this continues, the pressure of defaulted loans will increase many times. At the same time, the price of goods will increase and inflation will also increase.
The Central Bank has already informed that in the first quarter of this year (January-March) both the amount and rate of defaulted loans in the banking sector of the country have increased to a great extent. At the end of March, the amount of defaulted loans stood at Tk 1 lakh 82 thousand 295 crores. At the end of last December, defaulted loans were Tk 1 lakh 45 thousand 633 crore. According to that, the amount of defaulted loans has increased by Tk 36,662 crores in just three months. At the end of last December, the average defaulted loan rate in the banking sector was 9 percent. After just three months, the default rate has reached 11.11 percent.