The financial sector in Bangladesh is in the grip of a severe liquidity crisis, posing significant challenges to the economy.
The crisis has put the government on a double-edged sword as it continues to struggle to secure funds from the banking system for development activities and, at the same time, is unable to print money due to high inflation.
Economists said that ongoing dollar sales from reserves, increased investments in treasury bills, cash hoarding outside banks, and a surge in non-performing loans had exacerbated the crisis.
Bankers are increasingly relying on borrowing from the central bank to maintain operations.
On June 13, the last working day ahead of Eid-ul-Azha, banks borrowed a record Tk 22,406 crore. The trend continued even after Eid, as banks borrowed a total of Tk 15,051 crore on June 27 and Tk 16,484 crore on June 30.
Excess cash in banks dropped to Tk 8,409 crore in April from Tk 19,966 crore in December 2023 and Tk 32,059 crore in December 2021, according to Bangladesh Bank data.
Large sums of money could be hidden by corrupt individuals, contributing to high cash holdings outside banks.
According to BB data, the central bank issued physical notes worth Tk 2,92,186 crore until April 30.
Of the money, Tk 2,64,349 crore or 90.47 per cent were outside banks.
Furthermore, persistent inflationary pressures have eroded the purchasing power of the currency, prompting depositors to withdraw their funds to meet rising living costs, bankers said.
Against this backdrop, the central bank has ceased lending to the government by printing money.
It compelled the government to repay existing loans to BB by taking new loans from banks, creating further pressure on the banking sector.
Many banks have been unable to maintain adequate Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), highlighting the severity of the crisis.
Consequently, private sector credit growth plummeted to 9.9 per cent in April from 11.28 per cent in the same month of 2023.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, told ¶¶Òõ¾«Æ· that high non-performing loans and capital flight are directly linked to the current liquidity crisis and other challenges faced by the banking sector.
He emphasised curbing corruption, which, according to him, would resolve many of the challenges faced by the banking sector.
Mansur warned that the crisis might extend if the government continued to borrow from commercial banks and suggested focusing on obtaining foreign loans to reduce government borrowing from the banking system.Â
As commercial banks continue struggling with the liquidity crisis, the demand for borrowing might force the central bank to print additional money, he warned.
‘Considering the ongoing high inflation, this could have devastating effects,’ said the economist.
According to Bangladesh Bureau of Statistics data, overall inflation rose to 9.89 per cent in May, the highest since October 2023, when it hit 9.93 per cent.
Inflation has remained near 10 per cent since March 2023.
Bangladesh Bank›s warning of forced mergers under the prompt corrective action framework issued on December 5, 2023, further fuelled panic among depositors.
Deposits in banks rose slightly to Tk 16.81 lakh crore in April from Tk 16.53 lakh crore in December and Tk 16 lakh crore in June 2023, marking modest growth of only 5 per cent over the year.
Emranul Haque, managing director and chief executive officer of Dhaka Bank, feared that the ongoing liquidity crisis may worsen when credit demand would increase with the government initiating or expanding projects.
He explained that the liquidity crisis has deepened as banks have not received deposits at the desired level due to persistent inflation.
Additionally, many high-net-worth individuals have diverted their deposits from banks to invest in government treasury bills, which offer high interest rates.
Speaking to ¶¶Òõ¾«Æ·, Haque noted that the government set a target to borrow Tk 1, 32,395 crore from the banking sector in the financial year 2023-24 to meet the budget deficit.
It may further exacerbate the situation, he said.
Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, stated that the liquidity crisis would not go away overnight.
He noted that high non-performing loans and poor loan recovery have made it difficult for banks to manage liquidity.
Some banks are now continuing operations solely through borrowing from Bangladesh Bank, he added.
Over the past 36 months, Bangladesh Bank has sold approximately $34 billion from its foreign exchange reserves to banks, effectively mopping up more than Tk 3.5 lakh crore from the banking sector, assuming an average dollar rate of Tk 103 each.
In response to high inflation, the Bangladesh Bank has continued its contractionary monetary policy to squeeze the money supply and make borrowing more costly.
Additionally, banks have become reluctant to provide loans, preferring instead to invest in government treasury bills and bonds, which offer high-interest rates.
The interest rate on treasury bills has soared to a record 12 per cent.
Trust in the banking sector has also been eroded by loan irregularities and scandals in several banks, including those controlled by the S Alam Group.
The total deposits in the Islamic banking system plunged by Tk 3,938 crore to Tk 4,39,465 crore at the end of March 2024, compared with the end of December 2023.
Excess liquidity in Islamic banks nosedived to Tk 1,518 crore in March 2024 from Tk 6,643 crore in December 2023.