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Is the banking sector facing a liquidity crisis?

  • Published at 11:09 pm January 30th, 2018
Is the banking sector facing a liquidity crisis?
Just six months ago, the banking sector was facing problems over surplus liquidity. A number of banks had to stop taking deposits to reduce the burden of extra liquidity which stood at around TK1.25 lakh crore. The problem was exacerbated by the fact that investors did not see attractive growth for private sector investments. The situation appears to be changing as managing directors of different banks who had discouraged depositors three months ago, now say they fear a liquidity crisis in the sector, thanks partly to their aggressive credit disbursement strategies. In this situation, the MDs have given a letter to Bangladesh Bank governor Fazle Rabbi about the impending crisis. The latest Bangladesh Bank report says the surplus liquidity in banking sector is now Tk 86,463 crore. Among them, Islami banks alone have surplus liquidity of Tk6462crore. South Asian Network on Economic Modeling (SANEM) executive director Prof Selim Raihan has said they do not see any prospect of sharp growth in private sector investment. “So, there shouldn’t be any liquidity crisis. However, the trend of loan disbursement is increasing aggressively in banking sector,” he said. “The personal loan growth came down in the last six election years and the years close to the election. But all of a sudden the loan disbursement is getting high in the sector,” added Selim. He suggested the central bank can boost surveillance on where the money is disbursed in the election year. Even after raising the public investment in last six years, the investment in individual or private sector remains stuck at 22-23% of Gross Domestic Product (GDP), according to Bangladesh Economic Survey-2017. In such a situation, the banks are disbursing loans aggressively.
Many have disbursed loans exceeding their limits. If the Advance Deposit Ratio is reduced now, the banking sector will need additional deposit of Tk 20,000 - Tk25,000 crore
According to Bangladesh Bank’s data, private sector loans have seen a growth of 19.06% in November last, 18.63% in October, 19.40% in September, 19.84% in August, 16.94% in July and 15.66% in June. Al Arafah Islami Bank managing director Md Habibur Rahman said there is not much surplus liquidity in banking sector because of sudden rise in loan disbursement. “Many have disbursed loans exceeding their limits. If the Advance Deposit Ratio is reduced now, the banking sector will need additional deposit of Tk 20,000 - Tk25,000 crore,” he added. Meanwhile, Bangladesh Bank has decided to reduce the ratio of loan and deposit of banking sector to prevent aggressive banking activities. However, Association of Bankers Bangladesh (ABB) has requested the central bank governor Fazle Kabir not to implement the decision. In a letter to the governor, ABB leaders said if the decision to reduce the ADR to around 80.05% is implemented, it may require a substantial additional deposit for banking sector. Central bank’s statistics indicates that the private sector investment has not developed in the country. According to its latest report, the surplus liquidity was Tk 86,463 crore as of September 2017, which was Tk126,000 crore in January, and Tk122,000 crore in June. As the investment situation has not improved for long, the banks have invested a major portion of their surplus liquidity in bonds and bills that provide small interests. The banks have invested at an interest rate less than 2.5% with the duration of one or two weeks and one month. According to the rule, the commercial banks can disburse loans up to Tk85 if they collect deposit of Tk 100, however, the Islami banks can provide loans up to Tk 90. But recently, most private banks have disbursed loans more than 90%. In a meeting on January 3, Bangladesh Bank governor instructed the private banks to shun such aggressive investments. Bangladesh Garments Manufacturers and Exporters Association (BGMEA) president Siddiqur Rahman said the rise in interest rate of bank loans indicates that the investment situation has not been improved. The liquidity crisis in the banking sector is the reason behind the rise in interest rates, said the BGMEA chief. Echoing the same view, former BGMEA president Abdus Salam Murshedy said though the volume of bank loans has risen because of political stability, the investment situation in the private sector has not become normal yet. “The investors are not opting for investment since they have not been given the assurance of gas and electricity,” said Murshedy, adding that he thinks liquidity crisis is positive for the economy. Meanwhile, most of the banks have raised rate of interest on deposits this year to attract depositors. Agrani Bank has fixed the interest rate at 5% for three month term deposits (0.5 rise), 5.25% for six month term deposits, and 5.50% for one year or above term, according to new rates. The state owned Rupali Bank also increased the interest to 5.25% from previous 4.50% for three month term deposits, 5.50% for six month term deposits from previous 4.75%, and 6% for deposits with one year or above term from previous 5%. For short term deposits the bank is providing 4% of interest from previous 3% and for saving deposits, the rate is now set at 4% instead of previous 3.5%.   This article was first published on Bangla Tribune