Liquidity Crisis Looms As Imports, Credit Demand Rise
Banks will experience a liquidity shortage within three to six months due to escalating import financing and growing demand for business loans as the economy returns to normal, several senior executives warned yesterday. .
Excess liquidity had remained at historically high levels in June due to the economic slowdown caused by the coronavirus pandemic, but the trend has already started to reverse.
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Five managing directors of banks said yesterday that import financing and credit growth to the private sector would increase exponentially in the coming months, which would subsequently create a liquidity squeeze.
Some banks are already feeling the pinch in the liquidity shortage, they said.
Banking sector surplus funds stood at Tk 219,600 crore in September, up from 5% a month ago, according to data from the Bangladesh Bank.
In June, excess liquidity reached a record high of Tk 231,711 crore. This forced the central bank to revive the Bangladesh Bill, an instrument used to mop up excess liquidity, in August.
But, the situation is now completely different mainly due to the excessive growth of imports.
Settlement of letters of credit (LC), also known as effective import payments, increased 47% year-on-year to $ 17.04 billion between July and September.
Imports are expected to increase further in the coming months.
The resumption of imports has pushed the growth of credit to the private sector.
Credit growth stood at 8.77 percent in September, down from 8.42 percent a month earlier.
Credit growth had slowed to 7.52 percent in the last fiscal year, the lowest in at least 28 years.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said liquidity stress has already become visible in some banks, but will spread throughout the banking system over the next two months.
“Businesses are almost back to pre-pandemic levels as the economy reopens.”
In this context, interest rates on Treasury bills and Treasury bonds are on the rise.
The yield on 10-year treasury bills stood at 6.80% in October, down from 5.63% in the same month a year ago.
The government borrows funds by issuing the securities, and banks primarily provide the funds by participating in auctions.
Abul Kashem Md Shirin, Managing Director of Dutch-Bangla Bank, said many companies now have working capital to speed up productions, which has a positive impact on credit growth.
In addition, the disbursement of term loans, with repayment terms of more than one year, is on the rise, a sign of new industrial investments, he said.
He estimated that the banking sector would face liquidity stress within six months.
Emranul Huq, managing director of Dhaka Bank, believes, however, that the liquidity shortage could hit the banking sector in the next three months.
“We are now lending heavily in the form of post-import financing to help importers run their businesses smoothly.”
“Credit growth to the private sector will exceed expectations in the current fiscal year,” said Md Arfan Ali, Managing Director of Bank Asia.
The central bank has targeted a 14.80% expansion of credit to the private sector in the current fiscal year.
Many banks are in a difficult situation to settle LCs, so they rushed to the central bank to buy US dollars.
Lenders must buy the greenback in exchange for the taka, which plays a role in wiping the local currency, he said.
The injection of US dollars to meet business demand will increase liquidity stress.
Ali, however, said the ongoing credit demand was an indication of the rebound in economic activity, and the situation should be tackled effectively.
The BB sold around US $ 1.38 billion between July 1 and October 27 to combat the depreciation of the taka against the dollar.
The average interbank exchange rate was 85.66 Tk to the dollar on October 31, compared to 84.80 Tk a year ago.
Mirza Elias Uddin Ahmed, Managing Director of Jamuna Bank, said if the productive sector was functioning well, excess or lack of liquidity would not be a cause for concern.
Huq of Dhaka Bank said that commodity prices in the world market had risen sharply, leading to a negative effect on import payments.