Liquidity or cash crisis is going on in the banking sector. A negative financial situation is characterized by a lack of cash flow. For a single business, a liquidity crisis occurs when the otherwise solvent business does not have the liquid assets necessary to meet its short-term obligations, such as repaying its loans, paying its bills and paying its employees.
If the liquidity crisis is not solved, the company must declare bankruptcy. An insolvent business can also have a liquidity crisis, but in this case, restoring cash flow will not prevent the business`s ultimate bankruptcy. Because so many companies rely on these loans to meet their short-term obligations, this lack of lending has a ripple effect throughout the economy, causing liquidity crises at a plethora of individual companies, which in turn affects individuals.
According to BB data to be released, Banks and NBFIs disbursed Tk. 54,162.76 crore as industrial loans in July-December this financial year against Tk. 52,536.77 crore in the first six months of FY2010-11.
The data showed that the growth in recovery of the industrial credit in July-December of FY2011-12 increased by 17.89 per cent compared to a 32.05-per cent growth in the same period of the previous financial year.
Industrial term loan disbursement by banks and NBFIs increased by 2.25 per cent in July to December of FY2011-12 compared to a 34.15-per cent growth in the same period of the FY2010-11.
The total disbursement of industrial term loans in July-December of this financial year stood at Tk. 17,305.28 crore against Tk. 16,923.70 crore in the same period of the FY2010-11.
The term loan disbursement in the first six months of FY2009-10 was Tk. 12,614.67 crore.
Resolve the Liquidity crisis with Remittances Income: Remittance inflows hit a decade high of $12.17 billion in the just concluded 10-year high, offering the government a much-needed cushion against dwindling foreign exchange reserves and exchange rate volatility.
Remittance has kept the Liquidity Crisis of Bangladesh more dynamic. Remittance inflows in the liquidity crisis of Bangladesh are getting larger every passing year, matching with the increasing external demand for its manpower.
The ensuing development impacts of remittances, as a means of transfer of wealth, on socioeconomic factors are increasingly viewed with importance.
Remittances have helped improve the social and economic indicators like nutrition, Liquidity crisis, living condition and housing, education, health care, poverty reduction, social security, and investment activities of the recipient households.
Higher Remittance earning may help increase private sector credit flow. If remittance continues to grow at the current rate, it will significantly take off pressure from the balance of payments. Liquidity or cash crisis is going on in the banking sector and it’s directly impacts on whole country’s economy.
Banks have become beleaguered to get rid of this liquidity crisis in the same times. To take immediate solution to crises, banks are increasing their interest rates on deposits. Their deposit management cost is increasing as they are collecting deposits at a high rate to immediate solution. Some Banks are increasing their lending rate to cope up with this additional cost day by day.
As the interest rate on bank financing is rising, the cost of investment of the entrepreneurs is also increasing with their business. We can see that the situation in the banking sector is not good at all and in the long run it will be hampered to the banking and financing sectors.
They have apprehended that if the current situation is not handled properly, the banking sector will face collapse in the future. BB needs to take steps to encourage commercial banks to collect remittances from foreign workers to achieve its target of private as well as public sectors credit growth in line with the monetary policy announced for the second half of the current calendar year.
The government has decided to borrow Tk. 230 billion in the current fiscal year (FY 2012-13) although the banking sector is still facing liquidity crisis. BB has set-up the target of private sector credit growth at 18.3 per cent for the first half of the FY 2012-13, slightly up from 18 per cent for the January-June period of the last fiscal year. Private Banks fixing such a target is a positive alarm for the commercial banks to collect or lend enough money to the private sector.
We think that it would be highly difficult and challenging to achieve the target if the central bank fails to keep up supply of liquidity in the money market timely. The private banks will extremely depend on the supply of money from the central bank as demand.
The BB has two options to liquid the market-either it has to supply additional money and another it has to increase foreign remittance. Bangladesh is import oriented country but it’s must be export oriented to resolve the liquidity Crisis.
Banks move to borrow costly money from BB: Liquidity crisis is recovered with liquid money from inter-bank call money market.
The high demand for cash of the nationalized commercial banks doubled the inter-bank call money rate. Bangladesh Bank data showed that the call money rate jumped to a new high of 15 percent from just 7.5 per cent.
The banks were desperate to mobilize cash and demanded a higher ceiling of up to 25 per cent as against the current 15 per cent fixed by the apex bank. The central bank is closely observing the developments and it would pump in money to help the banks, if needed, by tweaking the repo rate.
In November last year, the highest-ever rate of inter-bank borrowing stood at 37 per cent as against the lowest-ever 6.5 per cent. The volume of inter-bank borrowings had stood at Tk. 9,109 crore last year on the eve of the festival. However, the situation is different for the banking sector this year.
The banks have lost money in the capital market and, last year, channeled a heavy credit flow into the private sector, which together resulted in the cash crunch.
Severe liquidity or cash crisis is going on in the banking sector. Banks have become beleaguered to get rid of this liquidity crisis.
Liquidity crisis forced the commercial banks to increase borrowing of costly money from Bangladesh. As immediate solution to crises, banks are increasing their interest rates on deposits.
Some are maintaining their with each passing day expenditures after borrowing from the call money market at a high rate. Although the rate of interest for special Repo is 10.75 per cent against 7.75 per cent interest rate for Repo, banks were forced to take a huge amount of money through special Repo because of high government borrowings from banks that created liquidity crisis.
The rate for liquidity support is 7.75 per cent. According to BB data, the commercial banks, including primary dealer banks, took loans of Tk 16,026.01 crore on June 19, 2012 through Special Repo and Liquidity Support Facility from the central bank. As a result, the investment reached to Tk 22,550.76 crore in bonds and bills till April 2012, creating a severe liquidity crisis in the banks.
According to the latest BB data, the government’s bank borrowings stood at Tk. 19,480.46 crore on June 12, up from Tk 18,006.23 crore on June 11. Of the amount, the government borrowed Tk. 4,466.83 crore from the central bank and the remaining Tk. 15,013.63 crore from the commercial banks from July 1 to June 12 in the current FY2011-12.
However, the banks will be requested to keep the interest rate to a tolerable level. The interest rate on bank financing is continuously increasing. As a result, the inter-bank call money rate has remained high at 15 to 17 per cent now.
Thirty of the local and international banks have increased their lending rate in this April 12. In April 2012, the rate of interest in business loans has been 18 percent; whereas in March 2012 it was imposed maximum at a rate of 13 percent.
Businessmen have expressed their grievance at the interest rate increment of so many banks at a time to recover the liquidity crisis.
To recover present liquidity crisis the private Banks have taken major steps. To resolve the crisis, the banks borrow the liquid money from the money-market at a very high rate. In addition, they also collect short term deposits at a very high rate.
As a result the fund management cost of that bank increases the consequences into collapse of the overall system of the bank. The bank has also launched a double benefit scheme, which offers double the amount of saving after five and half years and FDR which is fixed one month to ten years.
The new deposit schemes introduced by the private Banks that are regular income programme, three yearly programme, double income plus programme, which offers to return double the amount of saving of one or ten lakh taka after six years, Lakhpoti Plus of two to ten-year terms, and Millionaire programme of three to thirteen-year terms.
The banks will provide free debit cards to anyone who will open a deposit account. The banks had always been trying to support their clients.
The new deposit schemes will boost the banks’ confidence and the clients will be benefited. But the high deposit rate will create a pressure on the banks to increase their lending rates.
The Bangladesh Bank’s move to increase the banks’ cash-reserve ratio compelled them to initiate more deposit programs with higher interests. As a result, their balance sheet remained in good shape.
Central Bank controls the liquidity position in the economy by the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
In the recent monetary policy, central bank has increased the CRR and SLR ratio. Increase of excessive investments in the unproductive sectors such as consumer products and luxurious goods, real estate, and the capital markets etc. creates the stress on liquidity.
In this situation, central bank is supplying liquidity help by REPO. Bangladesh could benefit from having a local-currency, fixed-income securities market.
At present, its main fixed-income financial products are bank deposits, bank loans, government savings certificates, term loans, treasury bills, and government bonds and corporate debt. But in general the corporate debt market is still very small compared with the equity market.
Bangladesh will not be able to develop an active, local-currency fixed-income market. Ideally, countries should try to build both primary and secondary markets for bonds.
Primary markets reduce the three risks noted; secondary markets, by adding liquidity and broadening the investor base, help reduce funding costs. Recovery situation must be implemented to improve the present liquidity crisis.
If Bangladesh Bank decreases the CRR and SLR then banks will get a huge amount of money which will help to solve the liquidity crisis many part of the country.
At last we can say that positive role of Bangladesh Bank, calculative measure of all other banks and a strong bond market can solve the current liquidity crisis in Bangladesh.
The writer is Senior Executive, The Premier Bank Ltd, O.R. Nizam Road Branch, Chittagong
BDST: 1730HRS, NOV 28, 2012
Edited by: Ershadul Alam, Law & Human Rights Editor
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