The banking sector is facing a liquidity crisis with several banks struggling to maintain their loan discipline and some finding it difficult to return depositors their money.
Certain banks are even requesting time from customers to cash checks worth Tk10 lakh, while several Shariah-based banks are operating with special assistance from the central bank.
Moreover, to complete daily transactions, most banks are continuously borrowing money from the call money market at high interest rates.
On Thursday, banks borrowed and lent Tk5,026 crore (overnight) at an average interest rate of 9.13%.
Bankers report that the sector has been grappling with a liquidity crisis for the past two years, with some Islamic banks suffering for over a year. This crisis has affected the overall banking sector, putting pressure on banks in their lending activities.
To control inflation, the central bank started decreasing the amount of money in circulation at the beginning of the fiscal year. However, due to decreased public confidence in banks and an increase in cash holdings by people, the liquidity crisis has worsened.
Fitch: Liquidity crunch plagues Islamic banks in BangladeshThe recent forced merger of weak banks with stronger banks has also caused panic, leading many to withdraw their deposits from weak banks. Not only general depositors but government entities have also issued letters to withdraw their deposits. The sharp decline in deposits has made it difficult for these banks to cover their daily expenses.
BASIC Bank and Rajshahi Krishi Unnayan Bank have already informed the finance ministry and the central bank about this issue.
Despite efforts to reduce the money supply, there have been instances where the money flow increased.
In July 2023-24, the money supply was reduced to Tk292,534 crore. This contraction continued until October, when the money supply dropped to Tk273,037 crore.
However, in November, it increased by Tk1,474 crore to Tk274,511 crore. In March, it was Tk291,189 crore.
This indicates that within five months, Bangladesh Bank injected Tk18,152 crore into the market.
By June, this amount had grown several times. The current money multiplier in the country is over 5, which can significantly impact inflation, making it difficult to control.
“On the one hand, there is talk of a contractionary monetary policy, yet on the other hand, banks are being given repo facilities,” said Dr Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
Lending under a contractionary monetary policy was completely contradictory, which was why inflation control was ineffective, he added.
According to the central bank, the interbank call money rate has exceeded 9% since the beginning of this month, the highest average rate in over a decade. On June 20, the highest interest rate for borrowing for five days reached 11.5%, and the maximum interest rate for a 91-day term loan reached 12.4%.
In the first 10 working days of this month alone, banks borrowed over Tk150,000 crore from the central bank.
On Thursday, several banks borrowed Tk8,481 crore from the central bank under Bangladesh Bank repo, assured liquidity support facility (ALSF) and Islamic banks liquidity facility (IBLF).
Previously, on May 19, 42 banks and four non-bank financial institutions (NBFIs) borrowed Tk17,092.04 crore from the central bank through repo and liquidity support facilities.
Thus, most banks are repaying old loans by taking out new loans. According to Bangladesh Bank, banks – both state-owned and private – borrow an average of Tk20,000-25,000 crore daily from the central bank and call money market.
People keeping cash outside banks despite promise of high returnsIn the first 10 working days of June, banks borrowed Tk152,665 crore from the central bank, with interest rates ranging from 8.5% to 8.75%. On June 9 alone, banks borrowed Tk20,000 crore from Bangladesh Bank.
A Bangladesh Bank report shows the amount borrowed by commercial banks from the central bank was Tk1,29,649.58 crore in the October-December quarter of last year.
In the January-March quarter, the loan amount stood at Tk1,35,771.87 crore.
This means that within just three months, bank borrowing increased by Tk6,112.29 crore.
What does Bangladesh Bank say?
Md Mezbaul Haque, executive director of Bangladesh Bank, said: “We are decreasing money supply as part of inflation control measures, leading to some liquidity crisis in banks.”
“Bangladesh Bank has implemented a contractionary monetary policy to control inflation, which has increased all interest rates. Additionally, Bangladesh Bank is using various tools to decrease the amount of money in circulation.
“However, to prevent the crisis from becoming severe, we are providing assistance through Bangladesh Bank repo, assured liquidity support facility, standing lending facility (SLF) and special liquidity support (SLS) for Shariah-based banks. Once inflation is under control and we exit the contractionary policy, the liquidity crisis in banks will subside."
