Banks are reportedly facing a major liquidity crisis and this is because a lot of depositors have withdrawn their money. This money has not taken flight out of the country, but is being kept under mattresses or holed up in private safes. The money that is no longer with financial institutions (FIs) is suspected to be to the tune of Tk 2.7 trillion, or Tk 2,700 billion. According to a report published in this newspaper on February 6, "currency outside the banking system is defined as legal tender in the hands of the public" and has been caused by a number of factors --- one being the galloping inflation that has taken the bite out of people's savings. More money is needed today than yesterday to buy essentials ranging from kitchen market goods to commodities of daily life.
The other factor, one that has made economists worried is the dearth of confidence in FIs. Repeated instances of graft involving financial institutions and the lack of initiative to bring those to book for crimes committed is effectively undermining people's confidence. The third factor is falling rates of interest on deposits. The combination of these factors (amongst others) has led a lot of people to believe that it is better to have cash-in-hand, rather than have cash in the bank.
In a country, where 'rumours' dictate a lot of the decision-making for ordinary people, lack of action on the part of the authorities to properly address scams is harming the economy. Although recently the interest cap has been lifted and banks desperate to fill their coffers are offering better interest rates, things will not improve until people's misgivings about the safety of their hard-earned money is adequately dispelled. These are not ordinary times. The global economy is reeling from all sorts of shocks. Advanced economies in Europe are contracting. Consumers from Europe to the American continent, are all tightening their belts as their wallets get squeezed. Not exactly promising news for countries like Bangladesh that remain heavily dependent on apparel export! Although Bangladesh serves the basic apparel market and hence better cushioned to survive the downturn internationally, it is fighting a losing battle against informal channels that facilitate inward remittance. That is why the news that 'legal tender' is growing should not come to anyone's supply. Indeed, what is learnt is that the volume of legal tender has "more than doubled in percentage to 27.27 per cent", which had, on an average, grown between 12 to 13 a year previously.
The fallout from all this, of course, is that it adversely affects how much FIs can lend. Until the situation with deposit growth can be checked, the health of FIs cannot improve. While the central bank is at liberty to keep reassuring the public that everything is fine, depositors need to see actions taken against big defaulters; and that means result-oriented steps, not just public announcements. The authorities need to do something in this regard or stop the drain. That more and more people are converting the local currency at hand and buying up foreign exchange, particularly US dollar, speaks volumes for which currency they believe to be more robust and a better bet against inflation. Restore people's confidence by tackling the issue of graft in FIs head on. The government needs to be seen as truly having a "zero tolerance" to corruption.
