Most banks in tight spot amid liquidity crunch

A majority of banks in Bangladesh, including those following Shariah principles, are currently grappling with operational challenges due to a liquidity crisis.

The liquidity problem has been exacerbated by the recent decision of the central bank to increase the policy rate in response to persistent inflationary pressures within the country.

Consequently, these financial institutions are increasingly relying on the call money market, a short-term money market, and the Bangladesh Bank to secure the necessary funds to meet their payment obligations.

On October 5, the average call money rate exceeded 7 per cent, coinciding with the banking regulator’s move to raise the policy rate by 75 basis points to 7.25 per cent, marking the most significant policy rate hike in the past decade.

This also marked the seventh increase in the last 18 months, as consumer prices remained at elevated levels.

Notably, the average inflation rate in September surged to 9.63 per cent, significantly surpassing the government’s target of 6 per cent for the current fiscal year.

The banking sector had already been grappling with a tight liquidity situation for the past year due to multiple contributing factors.

As of October 15, an increasing number of banks, including Shariah-based ones, continue to seek liquidity support from the central bank, despite the heightened policy rate, also referred to as the repo rate.

A total of 20 banks and one non-bank financial institution had availed Tk 18,381 crore under various facilities, including the repo facility, standing lending facility, liquidity support facility, and Islamic banks’ liquidity facility to address their liquidity shortages.

Non-Performing Loans (NPLs) in the banking sector reached a historic peak in June due to the withdrawal of a lenient central bank policy, a slowdown in business transactions, and deliberate non-repayments, resulting in a volume of Tk 156,039 crore.

This marked the highest NPL figure in the country’s history, surpassing the previous high of Tk 134,396 crore recorded in the third quarter of the previous year.

The central bank lifted the lending rate cap in June and introduced a new interest rate system to fulfil conditions tied to a $4.7 billion loan from the International Monetary Fund.

In August, the year-on-year growth of private sector credit was 9.75 per cent, slightly lower than the 9.82 per cent recorded in the preceding month.

August’s figure was the lowest since October 2021 when it stood at 9.44 per cent.

A surge in import bills, coupled with modest export and remittance earnings, led to a decline in foreign currency reserves, resulting in a record high for the US dollar exchange rate, exacerbating the liquidity crisis.

The current state of the country’s banking sector, on the brink of bankruptcy, is attributed to mismanagement, flawed policies, and deliberate loan defaults by businesses with political connections.

These businesses have received support that has had an adverse impact on Shariah-based banks in the country.

Responsibility for this situation lies with both the central bank and government authorities, and they must acknowledge and address it.