Banks should focus on managing liquidity in post Covid-19 market

by Rahel Ahmed

Banks should foremost focus on liquidity management to prepare for the aftermath of the coronavirus pandemic.

The second priority should be improving operational efficiency of banks for reducing cost because business volume of the banking sector will fall significantly due to a worldwide economic crisis caused by the outbreak.

Initially, the Bangladesh Bank's measures such as cutting down repo rate and cash reserve ratio helped banks hold a comfortable liquidity position. But the sector may require further easing of regulatory requirements depending on how long the current shutdown prevails.

Cash holding tendency amid an economic crisis will hurt banks' deposit growth. Moreover, foreign currency earning sources like remittance and export will remain down.

Amid this situation, the implementation of government- announced stimulus packages and a borrowing tendency after the pandemic will put pressure on liquidity in the banking sector.

So, ensuring liquidity supply will be a greater challenge for banks.

Repo rate has been reduced aiming at making funds cheaper for banks. But the duration of repo should be extended. Currently, the maximum tenure of repo is 28 days, which can be extended to one year considering the current crisis.

Repo rate, also known as policy rate, is the central bank's lending rate for commercial banks.

Garment exports fell by 83.74 percent in the first 15 days of April as compared to the same period of the last year, according to data provided by the Bangladesh Garment Manufacturers and Exporters Association.

Remittance, the lone economic variable that had been keeping the foreign exchange market propped up amid falling export earnings, also tumbled by 11.77 percent year-on-year in March this year as the coronavirus hit the global labour market.

Credit growth to the private sector continued to slide for several months reaching 9.1 percent in February, keeping banks awash with excess liquidity.

Although banks were in a comfortable position in terms of liquidity, the Bangladesh Bank in two phases cut cash reserve ratio from 5.50 percent to 4 percent and repo rate to 5.25 percent from 6 percent to tackle the deposit withdrawal pressure amid the shutdown, as well as the implementation of the Tk72,750-crore stimulus package.

Though the banking sector has the capacity to implement the stimulus package, small enterprises are likely to be deprived of the facility.

Small business will be affected more during the shutdown. The risk of recovering their business is also high. However, as banks have been given the full responsibility to recover loans, they will not lend to high-risk clients – small businesses.

In this circumstance, the Bangladesh Bank can provide credit guarantee against the stimulus package of Tk20,000 crore announced for micro and small enterprises.

If the central bank gives guarantee of at least 70 to 80 percent of credit, then banks will be interested in giving loans to small businesses.

The Bangladesh Bank has set strict conditions for the repayment of loans taken out by small enterprises, which will be difficult for them to comply with. This will create a high risk of defaulting.

For instance, if the loan amount exceeds the authorised limit due to imposed interest, clients will have to adjust the excess amount of loan within five days. It will be difficult for a small enterprise to adjust excess loan amounts within this period of time.

Rahel Ahmed is the general secretary of Association of Bankers, Bangladesh (ABB)

by Mehmood Husain

The banking sector will see a sharp rise in default loans in the post-coronavirus era.

Loan repayment and disbursement remains almost stuck since March this year as the Bangladesh Bank has deferred installment payment for clients till June.

Currently, classification loan reporting remains suspended. But when reporting will start after June, default loans will see a steep rise.  

Moreover, banks have been facing withdrawal pressure of deposits as small savers are using up their savings.

As a result, deposit growth is in a downward trend this month.

Amid this situation, new banks will see liquidity crunch.

Banks are analysing which sectors will see quick recovery in the post-Covid-19 period. For instance, the food sector will recover quickly and that’s why banks will ensure cash supply to such businesses first for the sake of their own survival.

Mehmood Husain is the managing director of NRB Bank

by Faruq Mainuddin Ahmed

The implementation of single-digit lending rate from April 1 this year has already eroded the profit margin of banks. Banks are likely to witness further decline in their profit post-coronavirus period.

The Bangladesh Bank can forgo dividend distribution for one year to improve the capital base of banks. But there is another barrier -- the government in the national budget for the current fiscal year has made dividend declaration mandatory for banks. A failure to announce a dividend will make a bank subject to pay additional tax.

Prior to the coronavirus outbreak, the banking sector was facing challenges with regard to high default loans and bringing down lending rate to single digit. The coronavirus crisis has only added to the sector’s woes.

In spite of making intense efforts, banks were not able to bring down default loans as there was no policy support from the government. Businessmen were blaming high interest rates for the increase in default loans. Their demands for lowered bank interest prompted the government to force banks to bring down lending rate to 9 percent.

There may be more pressure on banks to reduce the lending rate further after the pandemic. This will pose a major challenge for the banking sector.

Many good borrowers will become defaulters, which banks are ready to handle. But the actual concern lies with habitual defaulters who always look for taking advantage of interest waiver and loan rescheduling on various excuses. They will also try to cash in on the opportunity created by the coronavirus crisis.

Liquidity is not something to be concerned about right now. This is because the Bangladesh Bank has enough room to ease regulatory requirements. They will do it whenever needed.

But the main area of concern is channeling financing in the post-coronavirus period. Economic activities need to revive fully to create demand for financing.

Faruq Mainuddin Ahmed the managing director of Trust Bank

by Md Arfan Ali

Because banks are burdened with the responsibility to implement the stimulus packages and that there is a high risk of default in payment during such a crisis period, credit risk will be higher.

The increase in credit risk will charge on capital, squeezing the lending capacity of banks. 

Already, payment deferral for three months amid the coronavirus crisis has slowed down money back from customers.

There are also questions regarding the capacity of providing loans. Though, the Bangladesh Bank has eased regulatory requirements to increase liquidity, lending capacity largely depends on a bank’s capital adequacy.

If a bank remains in capital shortfall, it will not be able to lend. A major portion of banks remains below the required regulatory capital limit.

Capital adequacy ratio is an important indicator for banks to get international credit lines. If capital adequacy ratio declines, banks will face trouble in getting credit lines from foreign banks for export-import businesses.

So, lending will not boost overnight due to poor capital adequacy of banks.

Notwithstanding drops in export earnings and remittance, the foreign exchange market will remain stable due to low import cost.

In the international market, commodity prices have declined significantly. The drastic fall in oil price in the international market, a major segment of import expenditure, will give a great relief to the government.

The fall in prices of other import items in the international market will reduce LC (Letter of Credit) settlement cost for banks.

Md Arfan Ali is the managing director of Bank Asia