Liquidity crunch to deepen further

With low growth of deposits coupled with constant rise in default loans, the ongoing liquidity crisis in the banking sector will deepen in coming days, said the Centre for Policy Dialogue (CPD).

“The crisis in the banking sector cannot be resolved by tinkering with interest rate,” Dr Debapriya Bhattacharya, distinguished fellow of the CPD, said at the launch of the think tank’s report titled “State of the Bangladesh Economy and the Budget Challenges” at the Cirdap auditorium in the capital on Tuesday.

Earlier in August last year, then finance minister AMA Muhith announced to bring down interest rate to single digit.

His announcement came after both public and private banks agreed to lower lending rate at 9 percent and deposit rate at 6 percent following the government’s instruction.

“It was thought that there are some good and some bad borrowers. If they are given some interest facilities, they will come to the banks the next day like gentlemen and deposit crores of taka,” said Debapriya.

“This is a completely wrong idea. People’s confidence in the banks may erode if structural governance of the banks is not restored and punishment is not meted out to those who have plundered the banks,” he observed.

The fact that private investment did not pick up despite the current low interest rate regime proves that changes in rates will not come to any use, he said.

The real problem that prevails now is the liquidity crisis in the banks.

“Banks are not getting money and those who had taken loans are not returning the money. This has led to a shortage in investible funds,” Debapriya said.

He said the interest rate should be left to the market and management of the Bangladesh Bank.

“Lowering of interest rate will not even lead to any temporary solution of the crisis unless it is made flexible,” he said.

The tendency to keep the bank interest rate low has worsened the crisis, he added.

He said the increasing trend of call money market rates is an evidence to liquidity pressure in the banking sector.

The weighted average monthly call money rate increased from 2.17 percent in July last year to 4.5 percent in April this year, which is the highest since October 2015, according to the CPD report.

The excess liquid assets fell by 3.21 percentage points during one year from March last year.

There are risks that increased government borrowing from banks may lead to financial crowding out of private borrowing, putting adverse effects on private investment, the report said.

Although the new finance minister announced that default loans would not see even a penny rise after December last year, it increased Tk17,000 crore in the first three months of the current year, said Debapriya.

In January this year, Finance Minister AHM Mustafa Kamal announced that default loan will not increase further.

“As of today, what is on the balance sheet will remain the same – it will not increase in anyway,” Kamal told reporters soon after a meeting with bank owners.

The total default loan stood at Tk110,873 crore in March – 11.87 percent of the total loan, up from 10.30 percent in December last year, according to Bangladesh Bank data.

“If the people responsible for mismanagement of the financial market can influence policymaking, no solution will come in the banking sector,” Debapriya said.

A political decision is needed to prevent these people from influencing policymaking, he added.

Against this backdrop, the CPD proposed that the government form an independent banking commission to solve the crisis.