The banking sector of Bangladesh is facing a severe liquidity crisis, which is hampering its ability to lend and invest. The crisis is caused by various factors, such as high inflation, low deposit growth, dollar shortage, and rising import bills. The liquidity stress has become a major concern for the policymakers and the bankers, who are trying to find ways to overcome the challenge.
What is liquidity and why is it important?
Liquidity refers to the availability of cash or cash equivalents that can be easily converted into money. Liquidity is important for banks because they need it to meet their obligations, such as paying depositors, clearing cheques, and making loans. Liquidity also enables banks to invest in profitable opportunities and support economic growth.
What are the causes of the liquidity crisis?
The liquidity crisis in Bangladesh’s banking sector has been triggered by several factors, such as:
- High inflation: The inflation rate in Bangladesh has reached a multi-year high of 9.10 per cent in September 2023, due to the rise in global commodity prices, import bills, and foreign exchange reserves depletion. This has reduced the purchasing power of the people and discouraged them from saving money in banks. The deposit growth rate has fallen to 9.35 per cent in June 2023 from 13.80 per cent in June 2021.
- Low deposit growth: The deposit growth rate is the ratio of the increase in deposits to the total deposits of a bank. A low deposit growth rate means that the bank is not attracting enough funds from the public to meet its lending and investment needs. The deposit growth rate of Bangladesh’s banking sector has declined significantly in recent years, due to the high inflation, low interest rates, and lack of confidence in the banking system.
- Dollar shortage: The dollar shortage refers to the situation where the demand for foreign currency exceeds its supply in the market. This creates pressure on the exchange rate and depletes the foreign exchange reserves of the country. The dollar shortage in Bangladesh has been caused by the widening trade deficit, which is the difference between the value of imports and exports. The trade deficit has reached a record high of $82.49 billion in the fiscal year 2022-23, due to the surge in imports of capital machinery, industrial raw materials, food items, and petroleum products.
- Rising import bills: The import bills are the amount of money that a country has to pay for its imports of goods and services. The rising import bills of Bangladesh have increased its dependence on foreign loans and aid, which have to be repaid with interest. The rising import bills have also reduced the availability of funds for domestic investment and consumption.
What are the impacts of the liquidity crisis?
The liquidity crisis has adversely affected the performance and stability of Bangladesh’s banking sector, as well as the overall economy. Some of the impacts are:
- Reduced lending and investment: The liquidity crisis has reduced the ability of banks to lend and invest in productive sectors, such as agriculture, industry, and services. This has hampered the economic growth and employment generation in the country. The credit growth rate of Bangladesh’s banking sector has slowed down to 10.42 per cent in June 2023 from 14.02 per cent in June 2021.
- Increased borrowing cost: The liquidity crisis has increased the borrowing cost for banks, as they have to pay higher interest rates to attract deposits or borrow funds from other sources, such as inter-bank market, central bank, or foreign lenders. This has increased their operational expenses and reduced their profitability. The weighted average lending rate of Bangladesh’s banking sector has risen to 11.15 per cent in June 2023 from 10.45 per cent in June 2021.
- Increased default risk: The liquidity crisis has increased the default risk for banks, as they may not be able to recover their loans from borrowers who are facing financial difficulties due to the economic slowdown or other reasons. This may increase their non-performing loans (NPLs), which are loans that are overdue or not repaid according to their terms. The NPL ratio of Bangladesh’s banking sector has increased to 9.32 per cent in June 2023 from 8.44 per cent in June 2021.
What are the solutions for the liquidity crisis?
The liquidity crisis is a complex and multifaceted problem that requires coordinated and comprehensive solutions from various stakeholders, such as:
- The government: The government should take measures to control inflation, reduce trade deficit, increase export earnings, attract foreign direct investment (FDI), diversify foreign exchange sources, and improve governance and transparency in the public sector.
- The central bank: The central bank should take measures to ensure adequate liquidity supply, maintain exchange rate stability, regulate interest rates, monitor banking activities, and support financial inclusion and innovation.
- The banks: The banks should take measures to improve their deposit mobilization, asset quality, capital adequacy, risk management, efficiency, and customer service.
The liquidity crisis is a serious challenge for Bangladesh’s banking sector, but it is not insurmountable. With proper diagnosis, policy intervention, and collective action, the crisis can be overcome and the banking sector can play its vital role in the economic development of the country.
