Excess liquidity of banks
Friday, 5 October 2007
THE availability of a substantial amount of excess liquidity or investible surplus of funds in the country's banking system reflects the difficulties that the banks have been facing in making proper use of depositors' funds with them. If the depositors' fund cannot be lent out by the banks properly at a reasonable rate of interest, how will they foot the bill, in the form of interest payments, relating to such funds? Here, the worry is mounting for the banks because such excess liquidity or investible surplus of funds in the country's banking system now stands at about Taka 443 billion.
In this backdrop, the Bangladesh Bank has advised the commercial banks to make the best possible efforts for ensuring proper use of this amount of excess liquidity through stepped-up lending activities in productive sectors. A good balance between deposits and investments, specially by lending out the greater part of banks' resources for the best possible uses by loanee-clients, is the key to their (banks') viability. Thus, it is time for the banks to be innovative and dynamic to locate investment areas and inspire the borrowers to make proper use of their funds.
The use of banking funds in the Bangladesh context is all the more significant for the economy because of its yet-not-sufficiently developed capital market. In this situation, the banks are seen as the main supplier of institutional credits for businesses. Private sector investments in different enterprises are too linked to banking credits. If the banks' resources are not made ample use of by the private sector, then an economic slowdown becomes unavoidable. Here, both macro-economic issues and non-economic factors that directly and indirectly affect the overall business climate are matters of consequence as far as the use of bank credits is concerned. This is too relevant a factor to the present state of the Bangladesh economy. And it does certainly bring the issue of business confidence to the fore. The government has recognised this. This recognition should now lead to strong policy measures and their effective operationalisation to remove the causes of any unease or fear factor among all categories of economic operators.
It should be noted that the most effective way of positively taking care of the excess funds of the banks is fully activating or normalising economic activities. When the economy will be functioning on full gears, then automatically the banking funds would be demanded and borrowed to keep pace with the stepped-up economic activities. Thus, full-fledged operation of the economic cycle in Bangladesh in many vital sectors depends on the carrying-out of economic activities by businesses in particular and the people in general, with a growing sense of confidence.
On its part, the Bangladesh Bank has advised the commercial banks to lend more to small and medium enterprises (SMEs) and to relatively emerging enterprises run by women in order to make proper use of idle funds. There is no denying that the lending to such entrepreneurs merits consideration over the medium and longer terms. But the short-term needs of the banking sector will not be met by the same. Banks must also be allowed to solve their problems in respect of existing businesses where they had earlier made large investments but are currently unable to carry out normal banking transactions with them because of the prevailing circumstances. The fear among the clients of the banks about all their transactions remaining subject to scrutiny by different agencies of the government has also been making them (clients) all too cautious about dealing with banks. That fear in general has to be removed without undermining the efforts of the government to deal with high-profile or well-targeted cases of corruption and tax evasion.
In this backdrop, the Bangladesh Bank has advised the commercial banks to make the best possible efforts for ensuring proper use of this amount of excess liquidity through stepped-up lending activities in productive sectors. A good balance between deposits and investments, specially by lending out the greater part of banks' resources for the best possible uses by loanee-clients, is the key to their (banks') viability. Thus, it is time for the banks to be innovative and dynamic to locate investment areas and inspire the borrowers to make proper use of their funds.
The use of banking funds in the Bangladesh context is all the more significant for the economy because of its yet-not-sufficiently developed capital market. In this situation, the banks are seen as the main supplier of institutional credits for businesses. Private sector investments in different enterprises are too linked to banking credits. If the banks' resources are not made ample use of by the private sector, then an economic slowdown becomes unavoidable. Here, both macro-economic issues and non-economic factors that directly and indirectly affect the overall business climate are matters of consequence as far as the use of bank credits is concerned. This is too relevant a factor to the present state of the Bangladesh economy. And it does certainly bring the issue of business confidence to the fore. The government has recognised this. This recognition should now lead to strong policy measures and their effective operationalisation to remove the causes of any unease or fear factor among all categories of economic operators.
It should be noted that the most effective way of positively taking care of the excess funds of the banks is fully activating or normalising economic activities. When the economy will be functioning on full gears, then automatically the banking funds would be demanded and borrowed to keep pace with the stepped-up economic activities. Thus, full-fledged operation of the economic cycle in Bangladesh in many vital sectors depends on the carrying-out of economic activities by businesses in particular and the people in general, with a growing sense of confidence.
On its part, the Bangladesh Bank has advised the commercial banks to lend more to small and medium enterprises (SMEs) and to relatively emerging enterprises run by women in order to make proper use of idle funds. There is no denying that the lending to such entrepreneurs merits consideration over the medium and longer terms. But the short-term needs of the banking sector will not be met by the same. Banks must also be allowed to solve their problems in respect of existing businesses where they had earlier made large investments but are currently unable to carry out normal banking transactions with them because of the prevailing circumstances. The fear among the clients of the banks about all their transactions remaining subject to scrutiny by different agencies of the government has also been making them (clients) all too cautious about dealing with banks. That fear in general has to be removed without undermining the efforts of the government to deal with high-profile or well-targeted cases of corruption and tax evasion.