Banking system in Bangladesh gets into tighter liquidity situation as banks' cash stocks dip and cashable credits in vaults remain under hard pressure amid a crunch, experts have said.
As such, the liquidity supports from the central bank to tidy balance sheets of the fund-strapped banks keep ballooning, officials and bankers said.
Bankers list the depreciation of the local currency against the US dollar, NPL buildup under a lenient loan-rescheduling regime and higher government borrowings from the banking system following a contractionary monetary stance to contain inflation as factors sapping liquidity of the banks.
On the other side, receding remittances and export receivables in the supply chain of funds are also prompting squeeze in the banks' liquidity stock.
According to Bangladesh Bank statistics, the excess liquidity in commercial banks dropped to Tk 1.58 trillion in October from September's Tk 1.64 trillion in successive contraction. In August and July, the volumes of surplus liquidity in banks were Tk 1.74 trillion and Tk 1.81 trillion respectively.
Excess liquidity includes various cash and cash-equivalent assets, including treasury bills and bonds, along with cash reserves other than liquid assets.
Though the cashable funds available in the banks' vaults marked a little increase to Tk 316 billion in October from September's figure of Tk 307 billion, the volume is still low compared to the figure in October 2022 when it was Tk 342 billion.
The volumes of cash in vaults were recorded at Tk 331 billion and Tk 392 billion in August and July respectively.
Seeking anonymity, an official of the central bank said deposits in the banking system continued growing while private-sector-credit growth remained on a downturn. "Despite these developments, the banks are now facing liquidity pressure mainly because of higher NPLs (non-performing loans) and BB's devolvement-skipping decision."
He added: "Now, the banks are fully meeting government's domestic bank-borrowing requirement, which is also contributing to the liquidity pressure."
The central banker mentions that as part of its inflation-combat steps, the BB has raised the policy rate to 7.75 per cent to squeeze the money flow on the money market. "And now it is being reflected in the liquidity situation of the banks."
To avert the prevailing liquidity crunch in the banking sector the tendency of the fund-starved commercial lenders to seek support rose significantly, he informs.
The central bank handed out Tk 1.28 trillion in July 2023. The uptrend in feeding the banks continues as the entire monthly volume of the liquidity payouts ballooned to Tk 1.33 trillion in August, Tk 1.67 trillion in September and Tk 3.12 trillion in October, BB data showed.
Managing director and chief executive officer of Mutual Trust Bank (MTB) Syed Mahbubur Rahman says commercial banks are now going through liquidity tightness because of multiple factors, like higher NPLs, huge dollar purchase from the central bank and no devolvement-meaning currency printing-by the central bank in recent times.
"A key part of the assets in the banking industry is not performing and remained stuck because of the NPLs while the banks are spending a good volume of credits to buy dollars from the BB to settle their overseas-payment obligations," adds. At the same time, the central bank earlier used to meet major share of government's domestic bank-borrowing requirements through devolvement mechanism to lessen liquidity stress on banks. But, recently, the BB stepped away from the move to contain inflation and pass on the bank-borrowing appetite to the banks.
"All these factors are contributing to the reduction in liquidity. If the BB stops supporting liquidity, the tightness might get severer," the experienced banker alerts, adding that inflationary pressure is also forcing people to cash their savings.
According to the official data, banks' monthly dollar-purchase investment makes this curve: Tk 125 billion, equivalent to $1.147 billion, in July, Tk 126 billion ($1.154 billion) in August, Tk 106 billion ($0.966 billion) in September and Tk 132 billion ($1.198 billion) in October.
Alongside growing dollar buy from BB and government bank- borrowing stress, managing director and CEO of Dhaka Bank Limited Emranul Huq mentions how they are walking a tightrope to avert falling over.
Remittance inflow is going down while import payments going up. At the same time, the NPL-recovery process has not got pace to the expectation level, he says.
"These are creating more pressure on the liquidity situation. Under such liquidity stress, we need to carry out our banking proceedings in a very careful and cautious way to avert any serious liquidity-related trouble," says Mr Huq.
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