Liquidity has reached a record high in the country’s banking sector, with many refraining from investing anew and, at the other end, others failing to invest in government treasury bills and bonds in line with demand.
Many are even failing to lend call money or go for other forms of investments in banks or other financial institutions.
Despite such a situation, businesses are repeatedly being told to repay loans, much to the chagrin of the banks and their clients.
Excess liquidity in banks amounted to Tk204,738 crore at the end of December 2020 and is expected to hit the Tk225,000 crore mark after February, clearly showing that ideal money is increasing gradually.
However, businesses argue that the time to approach fresh loans is yet to come, causing the banks to suffer from the “swelling” liquidity.
Economists find the situation to be a forecast for a massive debacle in the country’s financial sector as the skyrocketing liquidity is ultimately weakening the “base” of the banks despite their portfolio getting bigger.
It is mandatory that a strategy and a mechanism be devised to emerge from such a situation. Many think that pressurizing businessmen to repay bank loans in such a situation is not fair. Some of them say that both the scarcity of money and excess liquidity are equally troublesome.
If the banks force loanees to pay back, it will further worsen the liquidity problem, they fear.
“We’re not in a position to do business now, which is why the excess liquidity problem has surfaced in the banks.
“Hence, the banks now need to reduce interest rates and other charges involved, giving us a chance to continue our business,” says Siddiqur Rahman, vice president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI).
Instead of pressurizing for repayment, the banks would have to concentrate on how they and their clients could be in a better position, he opined.
“Only depositing in banks is not profitable; investment is. We’ve to create an investment-friendly atmosphere, and there has to be scope for businessmen to repay loans,” Siddiqur maintained.
If businessmen are troubled, the banks will incur losses, he said, adding that charges were being imposed on businessmen to save insurers.
“The insurance companies must stop imposing additional charges,” he recommended.
The government had announced stimulus packages after the pandemic unfolded last year, with the grace period for repayment set till December. It has extended to June this year.
Bangladesh Bank says there was hardly any demand for loans despite the banks seeing ever-mounting liquidity. The country’s private sector credit growth till December stood at 8.37%.
The banks are not investing afresh, the central bank says, adding that private sector lending growth has dropped to almost half the expected range even after the disbursement of the stimulus package.
Not even the government is taking bank loans as announced, causing the ideal liquidity to “mount”.
Bankers’ take
Top officials of several banks said at least 30 private banks were in extreme trouble owing to the liquidity issue.
Also, the treasury divisions of the state-run banks were grappling with investing excessive liquidity.
The high-ups of the banks involved said they were bearing the brunt of the mammoth liquidity, which they used to invest in the government treasury bills, bonds or in the call money market.
The interest rate of treasury bills has now declined to 1%-- exactly five percentage points lower than that recorded in February 2020.
A similar fall is noticed with treasury bonds. Yields on the two-year bonds slumped to 3% while the call money rate, which is the rate at which the banks lend overnight money to each other, to 1%.
In such a situation, most of the banks are finding it difficult to handle their treasury management, said Mutual Trust Bank’s Managing Director Syed Mahbubur Rahman.
“The growth of remittance inflow and dull investment due to the pandemic is pushing up liquidity in banks. And there is no outline to use excess liquidity right now,” he said.
“Considering the situation, we’re trying to mitigate the losses by reducing the interest rate,” he said, admitting that depositors were getting minimal interest now.
The Citi Bank Limited’s MD Mashrur Arefin, seconding Mahbubur, said the investment-deposit rationale had not been proportioned.
“Although we’re keen to provide fresh loans, there is barely any big entrepreneur (applying for loans) in the country now. Meanwhile, seasoned businessmen are not taking the risk of re-investment,” he observed.
Liquidity in banks kept on stockpiling due to such a trend whereas the banks came across a completely reverse situation just a year ago, he said, adding: “Private banks were struggling at that time to maintain the cash reserve ratio and the statutory liquidity ratio.”
Many bankers started a mad race to bag investment from other banks at a much higher interest rate, only to get rid of the then liquidity shortage.
Notably, in the last fiscal year, the central bank registered a whopping Tk 554,779 crore liquidity, which came as assured liquidity support, repurchase agreement (Repo) and special Repo.
Moreover, it also contributed almost another Tk100,000 crore as an incentive, which many termed a major reason for the liquidity to “overflow”.
Atiur Rahman, a former governor of the central bank, says excess liquidity was a “sweet but strange” problem for banks.
Deserted investment in the private sector had led to the situation, and to get rid of it, small loans at lower interest rates could come in handy, he concluded.
