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Bailout package: Banks’ liquidity crisis to hinder implementation

  • Published at 09:05 pm April 6th, 2020
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Bankers, economists also call for Bangladesh Bank’s refinancing scheme

The stimulus package offered by the government to rescue businesses hard hit arising from the coronavirus pandemic would face difficulty in its implementation stage as banks face liquidity crisis, top bankers and economists observed.

They said the banks would not come forward to salvage industries and services sectors due to their long-drawn financial crisis caused by liquidity deficit and soaring non-performing loans.

Former ABB (Association of Bankers, Bangladesh) Chairman Syed Mahbubur Rahman said the implementation of the bailout package will be very challenging for the banking sector, as the already struggling sector was now facing huge liquidity shortage.

When the banks’ cost of fund stood at 7% to 7.50%, why would they lend at 9% rate, he questioned, adding most of the banks might not be interested to lend under the package.

“We are seeking a special refinance scheme from the Bangladesh Bank. Under the proposed scheme, the BB will lend to banks at 3% rate. Then, the commercial banks will be capable to lend at 9% rate during this crisis moment,” said Rahman, also the managing director of Mutual Trust Bank.

Abdul Halim Chowdhury, managing director and CEO of Pubali Bank said implementation of the stimulus package would be difficult for banks as most of them were facing liquidity shortage.

“We have no liquidity crisis in our banks but small banks do have crisis,” Halim said.

Prime Minister Sheikh Hasina on Sunday announced a  incentive package of Tk72,750 crore to overcome the economic impact caused  by the outbreak of the novel coronavirus. 

“The central bank will formulate several policies in this regard within the next one or two days to be served to all scheduled banks.  Then the business people can borrow from banks under the package,” a high official of the Bangladesh Bank told Dhaka Tribune yesterday.

Talking to Dhaka Tribune, former advisor of a caretaker government A.B. Mirza Azizul Islam said banks were now facing liquidity shortage owing to slow deposit growth. Banks have reduced the rate of deposit from  February, which worsened the growth of deposit. As a result, their lending capacity reduced, he added.

According to the central bank data, in January, banks' deposits stood at Tk1,138,632 crore, up only 0.06% from the previous month, which was the lowest since February last year.

“On the other hand, individual and institutional depositors are now withdrawing their deposits from banks to meet their essential needs during the crisis moment created by the novel virus. So there remains a concern to implement the bailout package,” said Mirza Azizul.

However, the central bank has taken several initiatives to meet the liquidity crisis in the banking sector and overcome the current economic crisis.

The Bangladesh Bank (BB) on March 24 slashed repurchase agreement (repo) interest rate from 6% to 5.75% and cut banks’ cash reserve requirement (CRR) from 5.50% to 5% in an effort to boost banks’ liquidity during the coronavirus pandemic.  

The banking regulator should further cut banks’ CRR, Mirza Aziz said.

Prime Minister announced Tk30,000 crore package for affected industries and service sector organizations as working capital.

The interest rate for the category is 9%, and the industries concerned and business organizations will pay 4.5% interest, meaning half the interest of the loan, while the government will pay the remaining half to banks as subsidy. 

Under the second package, small and medium enterprises (SMEs) including cottage industries will get Tk20,000 crore as working capital. The government will provide 5% interest as subsidy of the total 9% interest.

The government also decided to enhance Bangladesh Bank’s Export Development Fund and form a Pre-Shipment Credit Refinance scheme. 

Salehuddin Ahmed, former governor of the central bank said the bailout package was incomplete as the scheme refrained from offering anything for farmers, expatriate Bangladeshis and informal sector. The bailout package did not increase the cash benefit for those who were under the social safety net programme, he added.

He said it would be difficult for banks to implement the package as the sector was facing several problems, including high amount of defaulted loans.

It was not possible to implement the package without the central bank’s liquidity assistance, said Zahid Hussain, former lead economist of World Bank, Bangladesh.

The central bank should form a refinance scheme to meet the liquidity shortage of scheduled banks. 

Zahid Hussain said the government should be more focused on informal sector.

“If we do not help out the informal sector immediately, the people involved in the sector will come to the streets from their homes. As a result, the prevention of spreading the COVID-19 will be very difficult,” he noted.

The government also must ensure the workers' basic needs, including payment of timely wages and other facilities, he added.