Banks under heavy liquidity pressure

Call money rate heating up

Mahfuja Mukul: The commercial banks are under heavy pressure in terms of liquidity or money management. To deal with this pressure, on one hand, various banks are borrowing from the central bank at high interest rates under special liquidity support.
On the other hand, short term loans are taken from call money market or from other banks. This borrowing trend has now increased to an exorbitant rate. Banks have borrowed about Tk 28 thousand crores from various sources in a single day on Wednesday. Of this, Tk 24,500 crores have been borrowed from Central Bank, Tk 3,500 crores from call market and other banks. Banks are borrowing huge amounts of money almost every day in recent times. Most of these are borrowed from the central bank.
According to sources, major pressure has been created in liquidity management due to five reasons. These are – to meet the foreign exchange crisis, a part of the liquidity is going to the central bank by buying dollars from the central bank with cash. Banks are not able to sell dollars to the central bank due to the decline in export earnings and remittances from expatriates, as a result of which the supply of money from the central bank for buying foreign currency has decreased. The flow of credit is increasing more than the flow of deposits. As a result, more money is going out than what is going into the bank. Failure to collect disbursed debt does not increase liquidity. Banks’ defaulted loans are increasing, on the contrary, large sums of money are getting stuck while keeping provisions. Some weak and strong banks are now facing liquidity crisis. Some of these banks have lost huge sums of money due to major frauds. Several banks still have excess liquidity.
Meanwhile, according to a report of the central bank, due to the increased supply of liquidity from Bangladesh Bank, its flow has also increased in the banks. At the same time, the flow of deposits has also started to increase. However, there is some shortage of liquidity due to reduced remittances. Besides, earlier the trend of withdrawing money from banks and keeping it in the hands of the people is increasing but now it is decreasing. In this too, the supply of liquidity has increased a little more than before. Due to these reasons, the excess liquidity in the banks has decreased and has now started to increase. Last June, excess liquidity in banks was Tk 4 lakh 21 thousand crores. Last August it increased to Tk 4 lakh 38 thousand crores. Additional liquidity has increased by Tk 17 thousand crore in two months. In June 2021, excess liquidity was Tk 4 lakh 50 thousand crore, in June 2022 it decreased to Tk 4 lakh 42 thousand crore.
An official of the central bank said that some banks like Bangladesh Bank are taking liquidity support. There is also the opposite picture. In central bank treasury bills auction, many banks are showing interest in buying more bills than demand. That means there is excess liquidity in those banks.
Last Wednesday, 19 banks borrowed a total of Tk 24,455 crore under special liquidity support. Most of these are under seven-day tenor bills. A small amount was taken under a one-day term bill. In contrast, the average interest charged is 7.25 percent to 9.25 percent. Which is equal to the interest on bank deposits. Fund management cost of banks is increasing due to borrowing at high interest rates. On the same day, a bank borrowed about Tk 3,500 crores from another bank from call market and money market. Last Thursday, a total of Tk 4,852 crore was borrowed from the same market. Out of this, Tk 4,370 crores have been borrowed in call for one day. The remaining amount is short term loan.
On October 23, Tk 16,091 crores were borrowed from the central bank under special liquidity support. The interest rate was 7.5 to 15.9 percent. Tk 13,184 crores taken through the same instrument on October 22. 19 October Tk 12,518 crores. On October 18, Tk 14,823 crore and on 17 October Tk 15,532 crore were lent from the central bank. The interest rate of these was 6 to 15.9 percent. In this way, various banks are borrowing from the central bank almost every day.
According to those concerned, lending from the central bank to commercial banks is a regular occurrence, but it has increased excessively in recent times. Many people do not see this increase with good eyes. However, the central bank feels that the number of banks in the country has increased. Loan deposits increased. Among them is the dollar crisis. Due to these reasons, the transactions of commercial banks with the central bank have increased. Overall, there is excess liquidity in the banking sector.
In this context, prominent economist and executive director of Policy Research Institute (PRI) Ahsan H. Mansoor said that banks should give less loans than deposits. But they are paying more now. Debt collection should be increased, defaults should be reduced. It can’t. Remittance flows are not increasing. Dollars have to be bought from the central bank to repay the foreign debt. Besides, the government is now borrowing money from commercial banks instead of borrowing from the central bank by printing money. Loans taken earlier from central banks are now being repaid with fresh loans from commercial banks. A large part of the funds of the banks is being blocked. Due to which there is imbalance in liquidity management.
He also said that to deal with this crisis, deposits should be increased and loans should be reduced. Disbursed debt must be collected. Defaults should be reduced. Remittance should be increased. At the same time, it should be seen whether the money is being smuggled from the bank in the name of loan, if it is, it should be stopped.
According to the report of the central bank, the deposit flow in the banking sector increased by 8.40 percent in the last financial year. Credit flow increased by 15.25 percent. That is, loan flow has increased almost twice as much as deposits. Deposits increased by 10.18 percent in July-August of the current financial year. Debt increased by 14 percent. That is, loans are still increasing more than deposits. This is reducing the liquidity in the banks.
Most of the loans disbursed by the banks are not being recovered. As a result, defaults are increasing. In 2022, 8.16 percent of total loans were in default. Last June it increased to 10.11 percent. A large portion of the funds are stuck as defaulted loans increase. Provision has to be made against defaulted loans. About Tk 80,000 crore are stuck in this sector.
Meanwhile, the dollar crisis is evident in the banks. Foreign debt has to be paid by buying dollars from the central bank. In the last financial year, the central bank sold $1,357 million from the reserve to the banks. On the contrary, about one and a half lakh crores of money went from the bank to the central bank. It has sold nearly $4 billion so far in the current fiscal year. Against this, Tk 42 thousand crore have gone. At that time Tk 1 lakh 90 thousand crores went to the central bank. These funds are being returned to the banks under the central bank liquidity support. This situation has arisen due to the dollar crisis.
Meanwhile, export earnings and remittances have been decreasing since last June. Due to high prices of products in the international market, import costs are also high. As a result, banks do not have extra dollars. It is not able to sell dollars to the central bank. As a result, the supply of money in this sector has also decreased.