About a year ago, the banking sector was afloat with excess liquidity of around Tk 1,270 billion. The banks could not find client(s) to disburse those funds. One year on, the scenario has got totally changed. Banks these days are suffering from liquidity crisis and one of the most worrying issues of advance deposit ratio (ADR) has come to the fore.
Liquidity at the end of January this year stood around Tk 820 billion, which means around Tk 450 billion has already been disbursed during the period of just one year.
Why do the banks face liquidity crisis just within a few months from a position of liquidity excess?
Bangladesh's banking system is going through a strange and critical phase right now. A messy situation has been created in the banks thanks to huge frauds. Investigations by the Bangladesh Bank (BB) have been revealing, almost on a regular basis, cases where some name-only organisations had taken out huge sums in fake loans.
According to the central bank data, banks have received a total deposit of around Tk 850 billion while they disbursed around Tk 1,250 billion between January and December last year. During this period, the depositors were interested in investing in National Savings Certificates as the deposit interest of banks was too low. Now banks are seeking to puff up their deposit by offering interest rate as high as nine (9.0) per cent.
A large number of banks at the same time had gone on an overdrive in lending - much of it to the bad borrowers. This drive saw a phenomenal 19.06 per cent growth in private loans, much in excess of the targeted 16.2 per cent. The low lending rates made bank money particularly attractive. Now the lending rates vary from 10 per cent to 13 per cent.
Meanwhile, a number of the bank borrowers have defaulted on or delayed repayment - resulting in the banks' cash flow management going haywire. Their receivables could not be realised on time - thereby leading to deposit crisis. The amount of defaulted loans rose to 10.67 per cent in September last year against 9.23 per cent only a year before. Some Tk 150 billion worth of large loans were restructured in 2015 and most of these loans turned classified again.
A bank has to maintain a certain ADR and it cannot lend above a certain percentage of its deposit amount. But during that period, the ADR was 85 per cent for conventional banks. It even reached 90 per cent for the Islamic banks. The banks had already crossed limit for lending without increasing deposit - thereby straining their future lending capacity. To this was added the defaulted loans. Any loan not paid in due time was added to the banks' asset column - thereby making their ADR even worse. Meanwhile, the central bank has ordered the private commercial banks to reduce their ADR (83.5 per cent for conventional and 89 per cent for Islamic banks) with a view to controlling the aggressive lending.
As the central bank has lowered the ceiling of the ADR, it has now become a necessity to adjust Tk 200 billion by next June.
In another development, while the private banks are fighting with liquidity crisis, the government organisations are depositing their money with the state-owned banks, withdrawing funds from the private ones. They have only 25 per cent of their deposits with the private banks despite the fact that the private sector is now controlling over 70 per cent of banking market share in the country. The main reason for the ongoing liquidity crisis at the private banks is the higher rate of credit expansion against the rate of deposit expansion maintaining a gap of an appalling seven percentage points. The credit expanded to 19 per cent while the deposit expanded to 12 per cent at the end of December 2017. Another reason is that the depositors have moved towards national savings certificate instead of banks because of the higher interest rate in savings tools.
Last but not least, import has recently increased. Capital machinery import has increased by about 37 per cent. Sugar, rice, wheat and cotton imports have also risen quite significantly. This has put a pressure on dollar and dollar has, consequently, become pricier. This means importers now need more cash to buy dollar for the same amount of commodity. This, in turn, has put a pressure on banks' liquidity.
To ameliorate the liquidity crisis, the banks should curb 'aggressive lending', focus on the recovery of classified loans and increase their capital base by collecting more deposits.
Sk. Shamim Iqbal, an MBA in Banking from the University of Dhaka, is now serving in a private commercial bank. [email protected]
