Banks’ excess liquidity drops despite slow lending

Excess liquidity in the banking sector of Bangladesh continues to fall despite lower credit demand ahead of the national polls and higher interest on deposits offered by banks to lure savers.

At the end of September, surplus liquidity stood at Tk 1,64,000 crore, down from Tk 1,75,000 crore a month ago, central bank data showed. The excess fund was Tk 1,81,000 crore in July.

Bankers linked the decline to their investment in government treasury bills and bonds as well as the purchase of US dollars from the central bank by paying in the taka.

The fall came at a time when the private sector credit growth hit a 23-month low in September when it stood at 9.69 percent.

The liquidity crisis at some banks, including six Shariah-based lenders, has adversely impacted the overall cash position in the banking sector, which has been in a tight spot due to the foreign currency crisis for the past 18 months, a slow deposit growth, and the lacklustre loan recovery.

In September, the surplus liquidity at state-run banks was Tk 60,000 crore whereas private commercial banks were holding Tk 68,500 crore and foreign commercial lenders Tk 35,500 crore, Bangladesh Bank data showed.

Of the excess liquidity, Tk 34,000 crore was in the form of cash and Tk 1,64,000 crore was invested in treasury bills and bonds, among other sectors.

"The ongoing volatility in the foreign exchange market has impacted the liquidity situation," said Emranul Huq, managing director of Dhaka Bank.

The remittance flow has decelerated in the last few months, deepening the forex shortage. The export realisation has also slowed, tightening liquidity further.

A majority of banks have long been struggling to run their day-to-day operations due to the tight liquidity situation. This has forced the lenders, including Islamic banks, to secure liquidity support from the central bank despite the hike in the policy rate.

On Thursday, more than a dozen banks took Tk 19,065 crore from the central bank to meet their liquidity shortage.

The liquidity situation varies from bank to bank with some sitting on excess funds while others are experiencing a crunch.

At least a dozen banks, including six Shariah-compliant banks, are going through a severe liquidity crisis and have failed to maintain the minimum cash with the central bank, the central bank said in a report.

The Shariah-compliant banks are particularly bearing the brunt of the liquidity crisis after loan irregularities made headlines as the revelation prompted some borrowers to withdraw funds, industry insiders say.

A central banker says the government has started to borrow from commercial banks instead of the BB from the beginning of the current financial year, sending the excess fund level to go down.

From July 1 to September 27, the government borrowed Tk 25,709 crore from scheduled banks and repaid Tk 29,487 crore to the central bank, according to the BB.

The yield of treasury bills and bonds has increased in recent months, which have attracted investments at the expense of banks, the central banker added.

Mirza Elias Uddin Ahmed, managing director of Jamuna Bank, said the loan recovery is not in good shape at all because borrowers are not interested in paying back using the current economic slowdown as an excuse.

"This has tightened the liquidity situation."