Publish : 20 Nov 2021, 08:39 PMUpdate : 20 Nov 2021, 08:39 PM
Rising import costs, demand for credit, international price hikes, and a return to normal economic activities could soon lead to a liquidity crisis in the country's banking sector.
Economists and bankers warn that if this continues, the excess liquidity will decrease and from the second (October-December) or third quarter (January-March) of the current fiscal year, it will create a liquidity shortage.
Some banks are already feeling the pinch of the liquidity shortage, they said.
According to Bangladesh Bank data, surplus funds in the banking industry stood at Tk219,600 crore as of September, down by 5% from a month ago.
Back in June, excess liquidity had risen to a record high of Tk231,711 crore.
Even then in that situation, the central bank revived the Bangladesh Bill – an instrument used to mop up excess liquidity from the money market – in August.
Meanwhile, the yield on the 10-year Treasury bonds stood at 6.8% in October compared to 5.63% in the same month a year ago.
The government borrows funds by issuing securities, and banks mostly provide the funds by taking part in auctions.
But the situation is completely different now, say bankers.
“Every sector of the economy had negative growth due to the adverse impact of Covid-19 last year. But we recovered from the situation at the beginning of this year,” said Managing Director and CEO of Premier Bank Reazul Karim.
“Businesses have almost returned to the pre-pandemic level as the economy has reopened,” he added.
“In addition, the disbursement of term loans, whose repayment tenures are more than one year, is rising, which is a sign of fresh industrial investment. As a result, the stress on liquidity has already become visible in some banks as it has accelerated interbank borrowing,” he further said.
Although there is no major crisis in the banking sector now, Karim expressed his concern that the liquidity deficit may increase in the coming months.
“But this will spread throughout the entire banking system within the next couple of months,” he said.
Zahid Hussain, former lead economist of the World Bank office in Dhaka, said the whole world is overcoming the pandemic and the business sector has begun to regain growth.
The country's exports have increased again and the same has happened with the growth of private sector debt, he added.
“Many businesses were utilizing working capital to speed up production, putting a positive impact on credit growth. This will bring back the momentum to money that has been lying idle in the banks for so long,” the economist explained.
However, the continuous remittance deficit, keeping pace with rising international inflation, the declining value of taka against the US dollar, and rising imports, could lead to a liquidity crisis for banks, he added.
According to central bank data, excessive growth in imports and private sector growth is rising.
The settlement of letters of credit (LCs), also known as actual import payments, swelled 47% year-on-year to $17.04 billion in the first quarter (July to September) of the current fiscal year.
Experts said imports are expected to rise further in the coming months.
Meanwhile, the pickup in imports has pushed up private sector credit growth.
Credit growth stood at 8.77% in September, up from 8.42% a month earlier. It was only 7.52% in the last fiscal year – the lowest in at least 28 years.
During that time, banks adopted a cautious approach to giving out loans.
Rising import costs, credit demand, and global inflation could trigger liquidity crisis
Rising import costs, demand for credit, international price hikes, and a return to normal economic activities could soon lead to a liquidity crisis in the country's banking sector.
Economists and bankers warn that if this continues, the excess liquidity will decrease and from the second (October-December) or third quarter (January-March) of the current fiscal year, it will create a liquidity shortage.
Some banks are already feeling the pinch of the liquidity shortage, they said.
According to Bangladesh Bank data, surplus funds in the banking industry stood at Tk219,600 crore as of September, down by 5% from a month ago.
Back in June, excess liquidity had risen to a record high of Tk231,711 crore.
Even then in that situation, the central bank revived the Bangladesh Bill – an instrument used to mop up excess liquidity from the money market – in August.
Meanwhile, the yield on the 10-year Treasury bonds stood at 6.8% in October compared to 5.63% in the same month a year ago.
The government borrows funds by issuing securities, and banks mostly provide the funds by taking part in auctions.
But the situation is completely different now, say bankers.
“Every sector of the economy had negative growth due to the adverse impact of Covid-19 last year. But we recovered from the situation at the beginning of this year,” said Managing Director and CEO of Premier Bank Reazul Karim.
“Businesses have almost returned to the pre-pandemic level as the economy has reopened,” he added.
“In addition, the disbursement of term loans, whose repayment tenures are more than one year, is rising, which is a sign of fresh industrial investment. As a result, the stress on liquidity has already become visible in some banks as it has accelerated interbank borrowing,” he further said.
Although there is no major crisis in the banking sector now, Karim expressed his concern that the liquidity deficit may increase in the coming months.
“But this will spread throughout the entire banking system within the next couple of months,” he said.
Zahid Hussain, former lead economist of the World Bank office in Dhaka, said the whole world is overcoming the pandemic and the business sector has begun to regain growth.
The country's exports have increased again and the same has happened with the growth of private sector debt, he added.
“Many businesses were utilizing working capital to speed up production, putting a positive impact on credit growth. This will bring back the momentum to money that has been lying idle in the banks for so long,” the economist explained.
However, the continuous remittance deficit, keeping pace with rising international inflation, the declining value of taka against the US dollar, and rising imports, could lead to a liquidity crisis for banks, he added.
According to central bank data, excessive growth in imports and private sector growth is rising.
The settlement of letters of credit (LCs), also known as actual import payments, swelled 47% year-on-year to $17.04 billion in the first quarter (July to September) of the current fiscal year.
Experts said imports are expected to rise further in the coming months.
Meanwhile, the pickup in imports has pushed up private sector credit growth.
Credit growth stood at 8.77% in September, up from 8.42% a month earlier. It was only 7.52% in the last fiscal year – the lowest in at least 28 years.
During that time, banks adopted a cautious approach to giving out loans.
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