Banks have a crucial role to play in implementing Covid-19 related stimulus packages announced by the government since the major portion of these packages is in the form of liquidity support through the commercial banks. This is indeed a huge responsibility on the banks since the banking sector has been in weak condition during the pre-pandemic period. Indeed, during the last decade the situation of the banking sector has been deteriorating steadily which are reflected in the high volume of non-performing loans (NPL), escalation of loan write-offs, major scams, irregularities and heists in banks.
With the added responsibility, how the sector would manage its responsibility and how it would recover itself from the long weakness have been the two important issues that took the centre stage of discussion on the banking sector. Centre for Policy Dialogue (CPD) had earlier emphasised on clear guidelines to determine the eligibility of commercial banks for disbursing the liquidity support and highlighted the long-standing problems of the banking . This article discusses the current scenario of the banking sector in view of the ongoing pandemic.
IMPLEMENTATION OF LIQUIDITY SUPPORT PACKAGES: Bangladesh's economic recovery is expected to be driven by a fiscal stimulus package which is a meagre 19.29 per cent of its total Covid-19 relief funds (Table-1), or only 0.83 per cent of its Gross Domestic Product (GDP) and falls far short of the 11 per cent of GDP that is estimated to be required to mitigate the socioeconomic impacts of Covid-19 . Ironically, the largest industries which are relatively more capable of dealing with shocks received the greatest support from Covid-19 relief funds. Moreover, the varying speed of implementation of the various liquidity support packages has created an unequal turnaround as bigger firms have rebounded more strongly, owing to quick access to liquidity packages, while smaller firms have been left behind.
From the outset of the announcement of the Covid-19 liquidity support packages by the government, banks have been willing to lend to large borrowers, but were less enthusiastic to lend to small borrowers. In a "k" shaped economic recovery curve, the Covid-19 recovery path splits in two directions: large firms and public-sector institutions with direct access to government and central bank stimulus packages will make some areas of the economy recover fast but leave behind small and medium-sized enterprises (SMEs), blue-collar workers, and the dwindling middle class. It seems that the design of the stimulus packages and their distribution are driving a "k" shaped economic recovery path for Bangladesh.
PACKAGE FOR EXPORT-ORIENTED INDUSTRIES: As of November 2020, the Ministry of Finance's officially published report showed that 100 per cent of the funds allocated under this package, or US$595 million, was completely disbursed to 1,992 export-oriented business enterprises through 47 commercial banks . This money was used to pay the wages and salaries for the months of April 2020 and May 2020 of 3.5 million people working in export-oriented industries of the country. A rapid response telephonic survey of 62 RMG workers has shown that 85.1 per cent of workers did not receive their full wages for the month of March 2020, while 14.75 per cent of the workers did not receive their full wages for the month of April 2020 . Trade union leaders estimated that 10 per cent of RMG factories did not pay their wages in April 2020 and the industrial police reported that approximately 50 per cent of RMG factories did not pay the Eid bonus .
WORKING CAPITAL STIMULUS PACKAGE FOR AFFECTED LARGE INDUSTRIES AND SERVICES : As of October 31, 2020, around 71 per cent of the total funds allocated under this package were disbursed to 2,549 large industries and service sector business enterprises through 51 commercial banks. Out of the total US$4,762 million, an amount of US$ 654 million was earmarked for the payment of wages and salaries of 1.5 million persons working in large industries and services sector for the months of June 2020 and July 2020 . Due to the liquidity support offered by the government under this package, 2,549 large industries and service sector business enterprises could keep their businesses afloat during the pandemic. This liquidity support package also protected the jobs of 1.5 million employees and workers who were working in large industries and service sector enterprises and prevented their families from falling into financial hardship during the pandemic.
SPECIAL WORKING CAPITAL FACILITY FOR COTTAGE, MICRO, SMALL AND MEDIUM ENTERPRISES (CMSME) SECTOR: As of October 31, 2020, around 32 per cent of the total funds allocated under this package were disbursed to 41,069 entrepreneurs through 56 commercial banks and 20 non-bank financial institutions. Gender-wise disaggregation shows that 94 per cent of the beneficiaries of loans under this package were male and only 6.0 per cent were female . However, since no data on the share of women in the total number of entrepreneurs in Bangladesh could be obtained at the time of writing, it could not be ascertained whether providing only 6.0 per cent of loans to women was equitable or inequitable. It is worth noting that the government's directive was to provide at least 5.0 per cent of the loans under this package to women, so providing 6.0 per cent of the total loans under this package exceeds the pre-determined minimum quota for women. Nevertheless, this liquidity support package will allow 41,069 entrepreneurs of the CMSME sector to keep their businesses running and retain the livelihoods of 2.5 million workers involved with this sector .
STATUS OF OTHER PACKAGES
Export Development Fund: As of October 31, 2020, around 81 per cent of the total funds allocated under this package were disbursed to 2,379 exporters through 56 commercial banks .
Pre-shipment Credit Refinancing Scheme: As of October 21, 2020, only 1 per cent of the total funds allocated under this package were disbursed to 9 applicants through 31 commercial banks .
Special Incentive refinancing Scheme for Agricultural Sector: As of October 31, 2020, around 45 per cent of the total funds allocated under this package were disbursed to 89,934 farmers through 43 commercial banks .
Refinance Scheme for the Low-income Professionals, farmers and Marginalised Businesses: As of October 31, 2020, around 22 per cent of the total funds allocated under this package were disbursed to 1,00,227 low-income farmers and small traders through 42 commercial banks and microfinance institutions . Among the beneficiaries of loans under this package, 6 per cent were male and 94 per cent were female . However, since no data on the share of women in the total number of low-income farmers and small traders in Bangladesh could be obtained at the time of writing, it could not be ascertained whether providing 94 per cent of loans to women was equitable or inequitable.
Although the liquidity support and fiscal stimulus packages for Covid-19 began to be announced from March 25, 2020 onwards, even after more than six months, the pace of fund disbursement appears to be slow. As of October 31, 2020, only 32 per cent funds of the USD 2,381 million liquidity support package for SMEs was disbursed to 41,069 recipients. On the other hand, only 31 per cent funds were disbursed till that date under the package designed for the creation of jobs through loans. Under the refinancing scheme for low-income farmers and small traders liquidity support package, only 22 per cent of the funds were disbursed till 31 October 2020 (Table -1).
PAVING THE WAY FOR A "K" SHAPED RECOVERY: Data from Bangladesh Bureau of Statistics (BBS) show that the quantum index of industrial production (QIIP) fell more for small industries, compared to medium and large industries, after the start of the COVID-19 pandemic. For example, in June 2020, the QIIP for small industries fell by 98 units compared to a fall of 91 units for medium and large industries.
The slow pace of disbursement of loans under the government's liquidity support package for CSSMEs means that small businesses, which have been disproportionately damaged by the adverse effects of the pandemic, will find it more difficult to recover their losses and get back on track. As a result, it is likely that Bangladesh economy will experience a "k" shaped recovery from Covid-19, not only due to the blow of the pandemic which is beyond our control, but also from the policy related mistakes which could be avoided.
EXCESS LIQUIDITY IN THE BANKING SECTOR: In the early months of the pandemic, Bangladesh Bank undertook a number of measures to ensure adequate liquidity in the financial system to support the operations of financial institutions. It announced to buy treasury bonds and bills from banks ; lowered REPO rates from 6 per cent to 5.75 per cent effective from March 24, 2020 and further reduced them to 5.25 per cent effective from April 12, 2020 ; reduced Cash Reserve Ratio (CRR) from 5.0 per cent to 4.5 per cent (daily-basis) and from 5.5 per cent to 5.0 per cent (bi-weekly basis) , and again reduced it to 3.5 per cent and 4 per cent, respectively from April 15, 2020; increased advance-deposit ratio (ADR) for all the conventional banks from 85 per cent to 87 per cent, effective from April 15, 2020 ; increased investment deposit ratio (IDR) for Islami Shariah-based banks and the conventional banks operating under Islamic Shariah rules from 90 per cent to 92 per cent, effective from April 15, 2020 .
Data from Bangladesh Bank show that excess liquidity in the banking sector has nearly doubled from Tk 1.03 trillion in January 2020 toTk 2.05 trillion in December 2020 . During the same period, excess liquidity has more than doubled in state-owned commercial bank (SCBs) and more than tripled in Islamic banks (IBs). Excess liquid assets comprised of 49 per cent of the total liquid assets of the banking sector in December 2020.
Signs of excess liquidity were also manifested in the call money market, as the monthly average call money market borrowing and lending rates both tumbled down from June 2020 onwards. The low cost of funds in the call money market indicates that there was hardly any demand for funds, since the majority of banks most likely had excess liquidity.
Excess liquidity in the banking system led to a fall in the interest rates, which were already quite low even prior to 2020. The real deposit rate, calculated as the weighted average of the monthly deposit rate of all scheduled banks adjusted with the point-to-point monthly consumer price index inflation, fell from 0.12 per cent in January 2020 to -0.88 per cent in November 2020. The negative real interest rate on bank deposits means that the value of savings of ordinary people was being depleted away during the pandemic-a time when they needed to utilise their savings the most.
Generally, banks want to hold enough liquidity to make payments and convert excess liquidity into assets that provide returns. Excess liquidity in the banking system may induce commercial banks to behave in ways which may jeopardise the stability of the financial system and make it difficult for the central bank to achieve its monetary policy goals. For example, banks may attempt to offset their losses from holding excess liquidity by giving out risky loans which may lead to higher volume of NPLs, higher inflation and the creation of asset bubbles. Excess liquidity in the banking system also weakens the interest-rate transmission mechanism of monetary policy, making monetary policy less effective in fine-tuning aggregate demand. Moreover, when there is excess liquidity in the banking system, commercial banks may perceive the opportunity cost of holding excess balances at the central bank to be low, and hence be slow to act to reduce excess liquidity. As a result, the central bank would find it more challenging to determine the ideal level of desired and excess reserves.
Data from Bangladesh Bank show that in 2020, excess reserves of all banks increased from Tk 67.40 billion or 2.15 per cent of total liquid assets, in January 2020, to Tk 447.80 billion or 10.81 per cent of total liquid assets, in December 2020. Since excess reserves represent un-invested cash, holding excess reserves is costly for banks.
However, during the same period, banks have also increased their holdings of unencumbered approved securities, which are zero risk rated assets issued or guaranteed by the government. Excess liquidity held as unencumbered approved securities brings returns to banks, since such securities are earning assets. Data from Bangladesh Bank shows that in 2020, holdings of unencumbered approved securities of all banks increased from Tk 2.11 trillion, or 67.15 per cent of total liquid assets in January 2020, to Tk 2.80 trillion or 67.69 per cent of total liquid assets in December 2020. The decision of commercial banks to hold excess liquidity in the form of unencumbered approved securities instead of funds for lending shows that commercial banks perceive that the yields on risk free unencumbered approved securities are better than the risk adjusted returns on interest-bearing loans that come with default risk. This implies that commercial banks are hesitant to lend, as they probably believe that economic activity is yet to pick up and so their loans may have a high probability of turning bad.
Alternatively, excess liquidity is also a sign that the demand for loans is low, which is likely since the real economy is still experiencing the repercussions of the Covid-19 shock. The advance-deposit ratio of all banks fell to a three-year low of 0.81 in November 2020
The plummeting advance-deposit ratio points to the fact that economic activity is yet to pick up. This is also manifested in other economic indicators, such as proxy indicators of investment. Import of capital machinery, which is often used as a proxy indicator for investment, fell from Tk 27.88 billion in January 2020 to Tk 12.22 billion in May 2020 at the height of the pandemic, and then increased to only Tk 21.75 billion in November 2020 .
NON-PERFORMING LOANS MAY BE UNDERREPORTED: The central bank's decision to allow loan defaulters to access two of the largest liquidity support packages may lead to a rise in NPLs in the post-Covid-19 period. Due to the year-long moratorium on loan classification in 2020 by the central bank, it is not possible to understand the real situation of NPLs in the banking sector at present. As of September 2020, the ration of NPL was 8.9 per cent. This may not be the real picture the central bank's moratorium on loan classification. Under the lax regulations due to Covid-19, the performance of weak and poorly governed banks may get worse. Since the Financial Institutions Division (FID) of the Ministry of Finance has stopped publishing data on banks for several years, it is difficult to ascertain the actual state of the individual banks in the country.
Since the greatest share of Covid-19 related liquidity support has been offered to large industries, wilful defaulters may take this opportunity to default once again. Therefore, commercial banks have to use their own judgement to decide which potential loan seekers have been "affected" by Covid-19, since no clear, objective and quantitative criteria for defining the term "affected" has been declared by the central bank. The central bank has given the provision to commercial banks to provide loans for import of coronavirus related life-saving drugs, medical kits, equipment and other essential medical items without repayment guarantee, and in some cases at zero tariff. It is yet to be assessed how much illicit financial outflows may be boosted inadvertently due to the absence of repayment guarantee and import tariff, which may be leveraged for import over-invoicing and trade-based money laundering.
CONCLUSIONS AND RECOMMENDATIONS: There are a number of concerns about the state of the banking sector during the pandemic, and its role in the recovery of the economy. Unfortunately, there is no access to information on the true health and performance of the banking sector during the ongoing pandemic. Nevertheless, this report has discussed some of the pressing issues of the banking sector based on the limited data which was available at the time of writing this report. Based on current trends and related concerns, a number of recommendations have been made for enabling the banking sector to play a more constructive role in the economic recovery from the pandemic. These are mentioned below.
 Loan defaulters should not be allowed to access any of the Covid-19 related liquidity support packages.
 Weak and poorly governed banks should not be allowed to participate in the Covid-19 related liquidity support packages. Banks which are not fully compliant with BASEL III or the Banking Company Act should be not be allowed to participate in the Covid-19 related liquidity support packages.
 Clear, objective and quantitative criteria should be declared to properly identify "affected" businesses and individuals.
 Transparency and accountability mechanisms should be built into all Covid-19 related liquidity support packages, and more disaggregated data on the implementation status of all liquidity support packages should be published on a monthly basis.
 Disbursement of the government's Covid-19 liquidity support for small businesses, farmers and low-income professionals should be expedited immediately.
 Working capital support for the affected businesses and industries should be converted to term loans and loan repayment to banks should start in order to have a healthy banking sector.
A multi-stakeholder taskforce consisting of representatives from the various ministries, central bank, commercial banks, trade bodies, civil society, non-government organisations and academia should be formed for monitoring the delivery of the Covid-19 liquidity support packages and evaluating their effectiveness.
Dr Fahmida Khatun is Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman is Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem is Research Director, CPD; and Mr Towfiqul Islam Khan is Senior Research Fellow, CPD
[Research support was received from: Muntaseer Kamal, Syed Yusuf Saadat, Md. Al-Hasan and Kamruzzaman (Senior Research Associates, CPD); Mr Abu Saleh Md. Shamim Alam Shibly, Mr Tamim Ahmed, Ms Nawshin Nawar and Mr Adib Yaser Ahmed (Research Associates, CPD); and Helen Mashiyat Preoty and S. M. Muhit Chowdhury (Research Interns, CPD)]