Banks back in dire liquidity dearth

Banks seem back in dire liquidity dearth as excess cash after maintaining CRR (cash reserve ratio) compliance squeezed under a highly contractionary monetary regime, officials and bankers say.
Surplus credits available in the banks' vaults, the volume of excess liquidity which includes various cash and cash-equivalent assets, including treasury bills and bonds, along with cash reserves other than liquid assets also dropped significantly, stoking concern among the bankers.
According to Bangladesh Bank (BB) statistics, the volume of excess cash in the banking system was Tk 269 billion at the end of June 2022 and the coffer hit rock-bottom depth of Tk 116.30 billion after June 2023.
The downtrend accelerated further to reach Tk 54.30 billion until November 2023, the data of the BB, the country's central bank, showed.
The situation of the Islamic banks in terms of having excess cash is severer as the figure was around Tk 160 billion in June 2022 and dropped to Tk 28.71 billion by June 2023. The amount of excess credit plummeted to stand at only Tk 1.83 billion by November 2023.
On the other hand, the volume of excess liquidity in commercial banks was Tk 2.03 trillion in June 2022 and nearly halved to Tk 1.66 trillion and Tk 1.41 trillion by the end of June and November in 2023 respectively.
Seeking anonymity, an official of the central bank says deposits in the banking system continued growing while private-sector-credit growth remained stymied 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," the official says about the two drags.
Now, the banks are fully meeting government's domestic bank-borrowing requirement. On the other hand, the commercial lenders continue buying US dollars from the BB-managed foreign-currency reserves, which is also contributing to the liquidity jitters.
The central banker mentions that as part of its inflation-combat steps, the BB has raised the policy rate to 8.00 per cent to squeeze the money flow on the money market. "And now it is being reflected in the liquidity situation of the banks."
Talking to the FE, managing director and chief executive officer of Mutual Trust Bank (MTB) PLC Syed Mahbubur Rahman said excess cash in the banks continued declining significantly, which is not a good sign at all for the economy.
The cut-off yields on short-term government securities continue rising fast while the depositors keep demanding higher rates. It becomes really hard to keep the cash running, the experienced banker said about a dilemma.
Managing director and CEO of Dhaka Bank PLC Emranul Huq says the liquidity pressure on the banking industry has turned too severe to maintain CRR and SLR for some banks.
"To avert such liquidity tightness, many banks keep receiving increased liquidity support from the central bank against their purchased government instruments. As a result, they are running out of the risk-free investment," the top bank executive told the FE writer.
Mr. Huq mentions that overall economic activities slowed down in recent times because of various external and internal factors. "Under such circumstances, where does the liquidity go? I think the government urgently needs to find out exact reasons behind the liquidity shortfalls and act accordingly.

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