Banks are helpless for liquidity crisis

Mahfuja Mukul: Disbursed loans by banks are not being recovered. Most of the customers are not repaying the installments of their outstanding loans due to ongoing economic meltdown. Some commercial banks have become helpless. Banks that have never faced cash crisis are now turning to the central bank to meet their urgent needs.
The central bank is lending record amounts of money to distressed banks. On October 25, the maximum loan was Tk 24,500 crores. Last October 26 also gave a loan of about Tk 15 thousand crores. The overall effect of the currency crisis has been on the currency market. The cost of borrowing money is increasing.
Bangladesh Bank is lending to distressed commercial banks through special facilities. However, where earlier this loan was given at 3-4 percent interest, now it is being lent at a rate of up to 9.25 percent. The cost of borrowing is increasing in banks. As the cost of borrowing rises, banks are also raising interest rates on loans to offset losses. This is shrinking private investment.
Sources related to Bangladesh Bank have informed that some banks in the country’s banking sector have never faced financial crisis. Rather they always had idle money in hand. But the borrowers are not only taking anonymous loans from those banks, but most of them are not returning them. This is the problem. Some of these banks are now in severe cash crunch.
Even mandatory cash deposits with the central bank to protect the interest of depositors cannot be preserved. Day by day SLR and CRR are getting short. Banks have to pay fine due to this shortfall. The central bank is providing cash through special instruments to meet the essential expenses of the banks. This has an overall effect on the currency market.
As the supply of cash is less than the demand in the money market, the interest rate is also increasing. On October 25 last year, 5.79 percent of every Tk 100 had to be spent to take a loan from call market, it has increased to 7.80 percent on October 25.
Not only the interest rate has increased in the money market, the interest rate of commercial banks has also increased from Bangladesh Bank. Earlier, while the interest rate of repo and special repo, an instrument for borrowing from the central bank, was 4 to 5 percent, now it has increased from 7 percent to a maximum of 9.25 percent.
Those concerned said that if the cost of borrowing money from the bank increases, the interest rate of the loan also increases. And if the interest rate of bank loans increases, the business expenses of entrepreneurs increase. As business costs rise, private investment shrinks. Because the prices of all kinds of products have already increased. The dollar crisis exists.
In such a situation, if the loan interest rate increases, the investment cost increases. And that’s why businessmen refrain from new investments. According to the latest statistics of Bangladesh Bank, the growth of private investment was 9.75 percent last August. But considering the interest rate, real investment has become negative. Because if the interest rate of the bank loan is above 10 percent, the amount of the loan at the end of the year will increase by 10 percent if the interest is added. That is, if there is a loan of Tk 100, it becomes Tk 110 at the end of the year.
According to a source related to Bangladesh Bank, the policy interest rate has already been increased to control inflation by reducing the flow of money. To meet the crisis, the borrowing rate (repo) of banks from the central bank has been increased by a quarter of a percentage point.
Bangladesh Bank claims that one of the ways to reduce the flow of money in the market is to increase the policy interest rate. And increasing the policy interest rate will increase the funds management cost of the banks. And it will increase the interest rate of all kinds of loans. If the loan interest rate increases, people will spend less.
This will reduce inflation. However, against this, some traders said that the central bank has increased the policy interest rate on the condition of getting loans from the IMF. It is effective for developed countries that export more. But our economy depends on imports. Imports are more than exports.
A large part of what is exported again (made garments) goes abroad in the name of back to back LC. So, if the loan interest rate increases, the price of imported goods will indirectly increase. And in this case, the price of products produced with high-cost raw materials also increases. It does not reduce inflation but incites it.
A businessman said that banks are not able to provide dollars to import industrial raw materials as per their demand. Many times, product LC’s can’t be opened as per demand despite higher spend per dollar. In this, even half of their production capacity is not being utilized. Already after the dollar crisis, the overall commodity prices are also increasing due to the increase in the interest rates of the loans. Inflation is expected to increase rather than decrease.