Banks are experiencing a liquidity crisis despite rising deposit rates

Despite higher deposit interest rates and various efforts by the central bank, the Bangladesh banking sector continues to face a liquidity crisis that is hampering some lenders.

The main reasons for the crisis are high volume of non-performing loans (NPL), slow deposit growth, slow recovery of loans and lack of confidence in the banking sector due to rampant fraud, especially among Shariah-based lenders.

Bangladesh Bank also took measures to find a way out of the crisis, but they failed to ease the liquidity pressure faced by lenders.

After the interim government took power, the new central bank governor said no new money would be printed to support liquidity. Instead, commercial lenders were allowed to borrow from the interbank money market under BB guarantee.

However, as lenders struggle to borrow from the interbank money market to meet daily operational needs, the situation has only gotten worse.

The rush for funds pushed the interbank money market rate to a record high of 13.50 percent for 90-day term loans on November 23, signaling a deepening financial crisis.

Similarly, the average overnight interest rate in the call money market was 10.04 percent in November compared to 8.19 percent in the same month last year.

Anees Khan, an experienced banker, explained that the problem arises from a mismatch between assets and liabilities.

Although assets, especially in Islamic banks, have increased, a significant portion consists of distressed assets that are unlikely to be recovered.

“This has created a liquidity crunch as funds from these bad loans are not recycled into the banking system for new lending,” he said.

In addition, the lack of laundered money and the possibility of hiding funds outside the banking system are exacerbating the liquidity crisis.

These problems drive up interest rates in the interbank money market, forcing lenders to borrow at higher prices.

The stock of non-performing loans in the Bangladesh banking sector reached nearly TL 285,000 crore in September, accounting for nearly 17 percent of the total outstanding loans.

As more capital is locked up in bad loans, many lenders, especially sharia-compliant ones, find themselves unable to meet depositor demands or issue new loans.

This limits the cash available to manage day-to-day operations and fund new loans.

“This money, which escaped from the banking system in the form of problem loans, has not returned. So, lenders are struggling to replace these lost funds,” said Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank.

Moreover, incidents of financial mismanagement under the previous Awami League administration worsened the crisis.

For example, Beximco Group took a loan of Tk 25,000 crore from state-owned Janata Bank, equivalent to about 950 per cent of the lender’s paid-up capital. However, by the third quarter of this year, around TUR 19,000 crore had gone bad, pushing the lender’s bad loans to a record TUR 60,000 crore.

Meanwhile, between 2017 and June 2023, S Alam Group and its subsidiaries borrowed Tk 95,331 crore from six banks. Islami Bank alone financed 79 percent of this amount.

This figure is equivalent to 5.78 percent of the banking sector’s total outstanding loans as of March.

The fate of these loans hangs in the balance as the whereabouts of conglomerate owner Mohammad Saiful Alam remains unclear following political changes in August.

These factors undermined public confidence in the banking system, leading to a decline in deposits and an increase in demand for withdrawals.

In an effort to increase the deposit base, some lenders have raised deposit rates to 13 percent to attract customers.

However, if the overall banking environment does not improve, people may again decide to keep their money outside the system, exacerbating the liquidity crisis, according to Khan, also a former chairman of the Bangladesh Banks Association.

Another factor contributing to the liquidity crisis is the tightening of monetary policy by the central bank.

In late October, the central bank decided to raise the repo rate to 10 percent to tame demand and make money expensive for lenders.

This was the 11th increase in the repo rate since May 2022.

The measure is intended to curb inflation, but higher costs of funds have squeezed banks’ profitability, forcing them to offer higher rates on deposits and loans.

These higher rates, in turn, reduce demand for credit, further restricting liquidity.

Khan also noted that deposits are largely affected by headline inflation, which has hovered above nine percent in Bangladesh since March 2023.

“When people don’t have money in hand, deposits will naturally fall.”

Liquidity problems are further exacerbated by the fact that rules have been tightened for commercial banks to borrow from the central bank. The banking regulator now allows commercial banks to borrow from it only once a week, as opposed to twice a week previously.

Additionally, those with political ties to the previous regime, which was overthrown in a mass uprising on August 5, are refraining from keeping their money in the banking system.

This comes as the Bangladesh Financial Intelligence Unit has tightened its control over the bank accounts of those allegedly involved in irregularities under the watch of the previous government over the past 15 years.

Moreover, those who fled the country, fearing the consequences of political changes, are selling their assets at relatively cheap prices and moving money abroad through illegal channels, Khan added.

Experts suggest that the way out of the crisis lies in improving the overall business climate, increasing tax collection, increasing production and restoring confidence in the banking system.

Without such reforms, both private and foreign investment will continue to decline, they say, prolonging the liquidity crunch for at least six months to a year.

Husne Ara Shikha, chief executive and spokesman for the central bank, said the banking regulator has not yet taken any further measures to provide liquidity support to crisis-hit lenders other than loans in the interbank money market.

Mohammed Nurul Amin, chairman of GlobalIslami Bank, told The Daily Star that the central bank recently met with representatives of six crisis-hit banks to discuss their liquidity situation.

He also said that BB has plans to provide significant liquidity to mitigate the crisis.

So far, crisis-hit lenders have received TUR 6,850 crore in liquidity support from healthy lenders since the appointment of the new central bank governor.