Liquidity and credits in the money market: 2020 and beyond

Bangladesh Bank is maintaining an expansionary policy to support domestic investment in its efforts to maintain the country's growth target. Bangladesh Bank continues to buy dollars sent through the remittance process with the release of equivalent Bangladesh Taka. 

Additionally, it reduced the Cash Liquidity Ratio (CLR) to 4 percent which approximately accounts for a Tk40,000 crore of excess cash liquidity. Moreover, the central bank eased off the Statutory Liquidity Ratio to further create approximately Tk193,000 crore of liquidity. Bangladesh Bank maintained the reverse repo rate at 4 percent while the call money rate has hovered around 1 percent. 

With an abundance of money, even the 6 and 9 percent rate gimmick is being challenged for further reduction. Banks now have sufficient liquidity and there is hardly any need for deposit mobilisation. 

With such liquidity in possession, the banks still maintain their typical spreads over 4 to 5 percent. Depositors are effectively losing the value of their money in terms of point to point inflation at 5.52 percent. 

Credit growth has not taken off as targeted. Borrowers with a bad payment history are still interested in borrowing while borrowers with a good credit history are reluctant to draw further credit considering the uncertainty of their ability to service future debt. 

A large part of Covid-19-related assistance amounting to Tk120,000 crore (which is 4.3 percent of the country's GDP) aimed at helping people, businesses, entrepreneurs, farmers, industrialists and exporters still remains undistributed from the stimulus package of Bangladesh Bank available at an interest rate of 1 to 4 percent. 

The disbursement of a target Tk40,000 crore for the industrial sector and a further Tk20,000 crore for SMEs is yet to be completed with the HPM considering to extend further stimulus beyond this amount to keep economic activities going. Cash injections continue to be a part of the expansionary policy as well as the call for reductions in the rate of bank borrowing. In that regard, commercial banks are still managing to maintain the interest spread at the expense of good borrowers. 

Overall, private sector investment growth remains low despite the availability of liberal credit terms, fiscal incentives, lower interest rates and adequate cash float from the commercial banks.

The target of 6 percent budget deficit for an equivalent of Tk190,000 crore may not be required by the government as the ADP is being shrunk. 

The full target borrowing of approximately Tk84,000 crore from the banking system is unlikely and will ease the pressure off the money available for private sector investment. Additionally, the issue regarding the cash liquidity of Islamic banking has now been addressed through the introduction of Sukuk bonds which will hopefully aid the government's borrowing from the banking system. 

The significantly low cost of these Sukuk borrowing compared to current borrowing structures like the Sanchaypatra etc. will create significant savings for the government in terms of debt servicing and thereby allow the government to rationalise its investments in new areas of public goods and services. 

The management of the books of the commercial banks in 2020 and 2021 will involve a degree of uncertainty and challenges. The suspension of loan reclassifications, as well as decisions for deferral payments, will post a significant increase in profits for most commercial banks. 

The precautionary measures of Bangladesh Bank to create an additional 1 percent provision above the required standard provision rate of 1 percent will cushion uncertainty to some extent. This may not be sufficient for the commercial banks when all other support measures are gradually lifted. 

In the short run, if all the policy supports are lifted back to pre-Covid-19 conditions, say, in the second half of 2021, it is unlikely that the commercial banks would be able to maintain its balance sheet by the end of 2021. In that regard, the Bangladesh Bank will have to look prudently through the profits of commercial banks earned in 2020 with restrictions exercised immediately so that the profits are not distributed or transferred to bonus shares. 

The profits from 2020 should be transferred to a reserve fund (a special contribution to the Statutory Reserve Fund) created for the gradual shift to a normal course of business. Additionally, banks will need fiscal /tax incentives to create such funds to address this situation. 

The author is an economic analyst, a practising Chartered Accountant and former President of Chittagong Stock Exchange. He may be reached at [email protected]  

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.