Disquieting signs across the banking horizon

There are a few ominous signs in the horizon of the country's banking sector. The signs relate to liquidity situation and interest rates on both deposit and lending sides of a number of private commercial banks. Being under tremendous liquidity problems, these banks are now in the midst of a cut-throat competition to mobilize deposits offering interest nearly 4.0 to 5.0 per cent above the rates they used to offer even six months back. Higher deposit rates have, obviously, led to higher lending rates and consequent rise in the cost of doing business for the private sector people. More importantly, the developments centering the problem-ridden banks have created an uneasy situation in the overall banking sector. The banks that are comfortable with their liquidity situation are likely to feel the heat soon because of the increased flow of deposits to banks that are offering higher rates of interest. But why are some banks, in the first place, facing problems with their liquidity? One major reason has been identified is the strong surge in external trade in recent months. According to the central bank statistics, import payments during the first nine months of the current financial year (2010-11) recorded nearly 42 per cent growth as against the corresponding period of the previous fiscal mainly due to rise in both value and volume of imported food grains, capital machinery, petroleum products and industrial raw materials. For instance, between the months of July and March of this fiscal, the value of letters of credit (LCs) settled against the import of food grains stood at $ 1.38 billion while the same amounted to only $620 million during the corresponding period of last fiscal. Similarly, the value of LCs, settled during the period under review of the FY 2010-11 for capital machinery import, was nearly $500 million more than that of the same period of the last fiscal. The import of petroleum products also cost $700 million more during July-March period of this fiscal than that of the same period of last fiscal. The highest difference was in the case of industrial raw materials. The difference in the value of the LCs settled in this case was more than $3.0 billion. The hike in the prices of food grains and fuel oils in the international market was obviously a major factor. But a surge in the export of readymade garments which is dependent on large-scale imports of fabrics and other accessories might have played a part in the rise in the value of import of industrial raw materials. Yet another factor, the depreciation in the value of Bangladesh taka, which, according to many, is an unusual development against the falling greenback, has contributed to the woes of the banks with inadequate liquidity, on the one hand, and the rise in inflationary pressure on the other. Then again a clear picture about the current status of investment of the troubled banks in stock market is not available. Under the prevailing market situation, they might not be willing to depart with their investment for fear of substantial loss. But one question that might be agitating the minds of many: Where has the large fund withdrawn from capital market either as investment or profit in recent months has gone? In fact it remains an enigma. A substantial part of money invested in stocks during last two years was taken out from the banking system. The same, or a part of it, was supposed to return to the banking system following the market crash. But that has not happened. Nor the same has been invested in the government savings instruments. The gross sale value of the instruments in last couple of months would substantiate that claim. When some banks are now facing liquidity problem, yet another threat -- the possibility of borrowing a sizeable amount from the banking system by the government in the last quarter of the current fiscal to meet demands for funds on account of hectic development activities -- is looming in the horizon. According to a report published in the FE early this week, the primary dealer banks of government securities, which are already experiencing liquidity shortage, might come under intense pressure. In any case, the ongoing developments do not bode well for the banking sector. The banks that have been experiencing hefty growth in recent years might, for the first time, witness an erosion in their annual profit, which, if happens, would be a bad news for the government, in terms of its corporate tax collection. The same will be the case with the investors in shares of banks and if the dividend rate, whether in cash or in new stock, falls, that will have another adverse impact on the capital market. Both banks and non-banking institutions do otherwise account for a substantial volume of transactions in the stock exchanges of the country. zahidmar10@gmail.com