Addressing liquidity problems of banks

Md. Noor Solaiman Jewel Liquidity or cash-shortage problems are continuing in the banking sector. A negative financial situation is characterised by a lack of cash flow. For a single business, a liquidity crisis occurs when the otherwise solvent business does not have the liquid assets necessary to meet its short-term obligations, such as repaying its loans, paying its bills and paying for its employees. If the liquidity crisis is not solved, the company must declare itself bankrupt. An insolvent business can also have a liquidity crisis, but in this case, restoring cash flow will not prevent ultimate bankruptcy of the business. As so many companies rely on the loans to meet their short-term obligations, the lack of lending has a domino effect throughout the economy, causing liquidity crisis to a number of individual companies, which in turn affects individuals. According to Bangladesh Bank (BB) data, banks and NBFIs (non-banking financial institutions) disbursed an estimated Tk 541.63 billion as industrial loans in July-December this fiscal year against about Tk 525.37 billion in the first six months of FY 2010-11. The data shows that the growth in recovery of the industrial credit in July-December of FY 2011-12 increased by 17.89 per cent compared to a 32.05 per cent growth in the same period of the previous fiscal year. Industrial term-loan disbursement by banks and NBFIs increased by 2.25 per cent in July to December of FY 2011-12, compared to a 34.15 per cent growth in the same period of the FY 2010-11. The total disbursement of industrial term-loans in July-December of this financial year stood at Tk 173.05 billion against Tk 169.24 billion in the same period of the FY 2010-11. The term-loan disbursement in the first six months of FY 2009-10 was Tk 126.15 billion. Resolving liquidity crisis with remittance income: Remittance inflows have hit a decade's high of $12.17 billion, offering the government a much-needed cushion against dwindling foreign exchange reserves and exchange rate volatility. Remittance inflows in the liquidity crisis of Bangladesh are getting larger with every passing year, matching with the increasing external demand for its manpower. The ensuing development impacts of remittances, as a means of transfer of wealth, on socio-economic factors are increasingly viewed with importance. Remittances have helped improve the social and economic indicators like nutrition, liquidity, living condition and housing, education, healthcare, poverty reduction, social security, and investment activities of the recipient households. Higher remittance earning may help increase the private sector's credit flow. If remittance continues to grow at the current rate, it will significantly take off pressure from the balance of payment. Liquidity or cash crisis is going on in the banking sector with its direct impacts on the whole country's economy. Banks have become beleaguered, desperately trying to get rid of this liquidity crisis. To find an immediate solution to this crisis, banks are increasing their interest rates on deposits. Their deposit management cost is increasing as they are collecting deposits at a higher rate for an immediate solution. Some banks are increasing their lending rate to cope with this additional cost. As the interest rate on bank financing is rising, the cost of investment of the entrepreneurs is also increasing with their business. We can see that the situation in the banking sector is not good at all, and in the long run, it will hamper the banking and financing sectors. They apprehend that if the current situation is not handled properly, the banking sector will face a kind of collapse in the future. The Bangladesh Bank (BB) needs to take steps to encourage commercial banks to collect remittances from overseas workers to achieve its target of private as well as public sectors' credit growth in line with the monetary policy announced for the second half of the current calendar year. The government has decided to borrow Tk 230 billion in the current fiscal year (FY 2012-13), although the banking sector is still facing liquidity crisis. The BB has set the target of the private sector credit growth at 18.3 per cent for the first half of the FY 2012-13, slightly up from 18 per cent for the January-June period of the last fiscal year. Fixing such a target is a 'positive alarm' for the commercial banks in collecting or lending enough money to the private sector. We think that it would be highly difficult and challenging to achieve the target if the central bank fails to keep up supply of liquidity in the money market timely. The private banks will extremely depend on the supply of money from the central bank. The BB has two options when it comes to market liquidity --- it either has to supply additional money or it has to increase foreign remittances. Bangladesh is an import-oriented country, but it must become export-oriented to resolve its liquidity crisis. Banks' move to borrow costly money from the BB: Liquidity crisis is recovered with liquid money from inter-bank call money market. The high demand for cash of the nationalised commercial banks doubles the inter-bank call money rate. The Bangladesh Bank data showed that the call money rate jumped to a new high of 15 per cent from just 7.5 per cent. The banks were desperate to mobilise cash and demanded a higher ceiling of up to 25 per cent as against the current 15 per cent fixed by the apex bank. The central bank is closely observing the developments and it would pump in money to help the banks; if needed, by tweaking the repo rate. In November last year, the highest-ever rate of inter-bank borrowing stood at 37 per cent as against the lowest-ever 6.5 per cent. The volume of inter-bank borrowings had stood at Tk. 91.09 billion last year on the eve of the festival. However, the situation is different for the banking sector this year. The banks have lost money in the capital market and, last year, channelled a heavy credit flow into the private sector, which together resulted in the cash crunch. Liquidity crisis has forced the commercial banks to increase borrowing of costly money from the Bangladesh Bank. As an immediate solution to the crisis, banks are increasing their interest rates on deposits. Although the rate of interest for special Repo is 10.75 per cent against 7.75 per cent interest rate for Repo, banks were forced to take a huge amount of money through special Repo because of high government borrowings from banks that created the liquidity crisis. The rate for liquidity support is 7.75 per cent. According to BB data, the commercial banks, including primary dealer banks, took loans of Tk 16,0.26 billion on June 19, 2012 through special Repo and Liquidity Support Facility from the central bank. As a result, the investment reached Tk 22,5.51 billion in bonds and bills, till April 2012, creating a severe liquidity crisis in the banks. According to the latest BB data, the government's bank borrowings stood at Tk 194.80 billion on June 12, up from Tk 180.06 billion on June 11. Of the amount, the government borrowed Tk 44.67 billion from the central bank and the remaining Tk 150.14 billion from the commercial banks from July 1 to June 12 in the current FY 2011-12. However, the banks will be requested to keep the interest rate to a tolerable level. The interest rate on bank financing is continuously increasing. As a result, the inter-bank call money rate has remained high at 15 to 17 per cent now. Thirty of the local and international banks increased their lending rate. In April 2012, the rate of interest on business loans has been 18 per cent; whereas in March 2012, it was imposed to the maximum at the rate of 13 per cent. Businessmen have expressed their worries at the interest rate increment of so many banks at a time to recover the liquidity crisis. To recover from the present liquidity crisis, the private banks have taken major steps. To resolve the crisis, the banks borrow the liquid money from the money market at a very high interest rate. In addition, they also collect short-term deposits at a very high rate. As a result, the fund management cost of banks increases the consequences leading to the collapse of the overall system of the banks. The banks have also launched a double-benefit scheme, which offers double the amount of savings after five and half years, and FDR, which is fixed one month to ten years. The new deposit schemes introduced by the private banks are regular income programme, three-yearly programme, double-income-plus programme, which offers to return double the amount of saving of Tk 1,00,000 or Tk 1 million after six years, 'Lakhpoti Plus' with two to ten-year terms, and 'Millionaire Programme' with three to thirteen-year terms. The banks will provide free debit cards to anyone who will open a deposit account. The banks had always been trying to support their clients. The new deposit schemes will boost the banks' confidence, and the clients will be benefited. But the high deposit rate will create a pressure on the banks to increase their lending rates. The Bangladesh Bank's move to increase the banks' cash-reserve ratio compelled them to initiate more deposit programmes with higher interests. As a result, their balance sheet remained in good shape. The central bank controls the liquidity position in the economy by the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). In the recent monetary policy, the central bank has increased the CRR and SLR ratio. Increase in excessive investments in the unproductive sectors such as consumer products and luxury goods, real estate, and the capital markets etc. creates stress on liquidity. In this situation, the central bank is providing liquidity help by Repo. Bangladesh could benefit from having a local currency, fixed-income securities market. At present, its main fixed-income financial products are bank deposits, bank loans, government savings certificates, term loans, treasury bills, and government bonds and corporate debt. But in general, the corporate debt market is still very small compared to the equity market. Bangladesh will not be able to develop an active, local-currency fixed-income market. Ideally, countries should try to build both primary and secondary markets for bonds. Primary markets reduce the three risks noted; secondary markets, by adding liquidity and broadening the investor base, help reduce funding costs. Recovery situation must be addressed to improve the present liquidity crisis. If Bangladesh Bank decreases the CRR and SLR, then banks will get a huge amount of money which will help solve the liquidity crisis. We can say that the positive role of Bangladesh Bank, the calculative measure of all other banks and a strong bond market can solve the current liquidity crisis in Bangladesh. The writer is Senior Executive, Premier Bank Ltd, Brokerage Division, O R Nizam Road Branch, Chittagong. sjewel_cu@yahoo.com