Friday, January 13, 2012

Bangladesh Banking Sector Heading Toward Disastrous Situation

Severe liquidity or cash crisis is going on in the banking sector. Banks have become beleaguered to get rid of this liquidity crisis. 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 (for inter-bank transaction) at a high rate. In addition, some of the banks are borrowing from Bangladesh Bank through repos (Repurchase Agreements) after pledging the liquid assets like treasury bills and bonds. Their deposit management cost is increasing as they are collecting deposits at a high rate. Some of them are increasing their lending rate to cope up with this additional cost. As the interest rate on bank financing is rising, the cost of investment of the entrepreneurs is also increasing. As a result cost of production is rising. The entrepreneurs are avoiding bank financing as their cost of production is increasing. According to the bank analysts, the situation in the banking sector is not good at all. They have apprehended that if the current situation is not handled properly, the banking sector will face collapse in the future.
Increase of Interest Rate
However, the businessmen have become worried with the increase of the interest rate. They are saying that their cost of doing business is going up with the increment of the borrowing rate of bank financing. As a result the production cost is getting increased. In this situation, the commodity price is getting out of the reach of the mass people. The businessmen are apprehending that the inflation will increase further in the future. The Federation of Bangladesh Chambers of Commerce and Industries (FBCCI) -- the supreme organization of the business community -- has urged intervention of the Bangladesh Bank on reducing the higher interest rate, keeping the service charges within the tolerable level, and revising the interest rates for the financing in the productive sector.
In this regard, a group of businessmen led by A.K. Azad, chairman of this supreme organization of business community recently had a meeting with Bangladesh Bank Governor Dr Atiar Rahman. The businessmen discussed the overall condition of the trade and commerce of the nation with the Governor in a two-hour-long meeting.
Financing in Productive Sector
FBCCI Chairman A.K. Azad said that after the lending cap on the financing in the productive sector was removed on 9 March the banks were almost competing with each other in increasing the lending rate. Even before 9 March, the maximum lending rate for the business loan was 13 percent; whereas after 9 March the lending rate of 15 to 18 percent is being imposed on the businesses. Some of the banks have taken it to even 20 percent. Because of this, the cost of business is increasing. The FBCCI chairman believes that this will further ignite the inflation. The investment will not grow. No new employment will be generated. As a result the rate of unemployment will rise further. Under such condition, he expected that the central bank will take initiatives to determine the interest rate that will be beneficial to the economy.
Bangladesh Bank Deputy Governor Nazrul Huda has said that the businessmen have requested to redetermine the maximum lending rate. The Bangladesh Bank has informed the businessmen that there is no scope for redetermination of the interest rate. Moreover, the central bank cannot take such measure in the market economy. However, the banks will be requested to keep the interest rate to a tolerable level.
However, the interest rate on bank financing is continuously increasing. Bankers are not paying heed to the protests of the businessmen. Thirty of the local and international banks have increased their lending rate in this April. Among them, some of the banks have increased their interest rate by three to thee and half percent. In April 2011, the rate of interest in business loans has been 18 percent; whereas in March it was imposed maximum at a rate of 13 percent. Among the 30 private commercial banks 26 have increased their rate of interest in the current month. Among the other four there is a specialized bank and three foreign banks.
Businessmen have expressed their grievance at the interest rate increment of so many banks at a time. As per their opinion, the commodity price has already increased due to the rise of fuel price in the international market.
Fund Management of Banks
However, the fund management of the banks are facing cataclysm because of cash crisis. The total liabilities of some of the banks are not matching up with their total assets. As a result bank is losing their capability for settlement of claims including returning the deposits of the depositors.
As per central bank's guideline, in any particular month, the difference between the total assets of the bank and their claims to be settled must not be greater than 20 percent of their total asset. For example, suppose a bank in a particular month will have to pay off 100 takas (Tk), including earlier committed credit, returning the money of the depositors in the maturity of their deposits, and settlement of import payments. However, in that month, the total earning of the bank from adjustment of credit, proceeds from the maturity of treasury bills and bonds, income from different commissions, and income from the deposits has been Tk 80. So, the difference between the asset and liability would be Tk 20.
This is somewhat acceptable as per the asset liability management guideline of the central bank. Bank may adjust the deficit of Tk 20 from the call money market (the inter-bank market for funds) or through repos from the Bangladesh Bank. But if this difference becomes more than 20 percent, there is possibility of many sorts of hazards for the bank. For example, the captioned bank may face severe liquidity crisis. As a result, the bank loses its capability to settle any of its claims. The bank cannot meet the condition for keeping the mandatory cash reserve with the central bank Cash Reserve Ratio (CRR). The Statutory Liquidity Reserve (SLR) becomes deficient. To resolve the crisis, the banks borrow from the 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.
One of the high officials of the central bank said that as per the fund management of the banks, a bank has to estimate the probable liabilities in a month. Along with that the amount of total inward deposits at that particular month is also to be estimated. The fund management system of a bank is maintained on this basis.
However, many of the scheduled banks are not following this guideline in the recent time. They are incurring greater amount of expenditures not conforming to their income. As a result different bank are getting excessively dependant on the Bangladesh Bank and the call money market. Many banks are not being able to maintain their day to day expenditures.
An industrialist claiming anonymity informed that at the time of encashment of large amount of check, some banks are not paying within a day. After partially paying they are requesting to come in the next day.
For getting out of this crisis, some of the banks are borrowing from the call money market. Again they are rushing toward the Bangladesh Bank . Every day, they are borrowing more than Tk 90 billion as repo (borrowing for short-term) and under special liquidity support. In some days Bangladesh Bank is even lending Tk 100 billion.
Condition in Banking Sector
Bankers believe that the Bangladesh Bank is entirely responsible for such condition in the banking sector. As per their opinion, in the past seven months of 2010 Bangladesh Bank increased the CRR -- The banks' mandatory rate of reserve to the central bank twice. Because of this, approximately Tk 40 billion came to the central bank from the banks. As a result liquidity crisis began in the banking sector. As a result, in the first month of this year the rate of interest in the call money market climbed up to 170 percent that is recorded as the highest until now.
Dr Saleh Uddin Ahmed, former governor of the Bangladesh Bank, said that the initiative of the central bank to increase CRR was not proper and was not a timely step. He said that the reason was that in December, the banks adjust their entire year's transaction. In this time, they normally disbursed less amount of credit and collected greater amount of deposits, he stated. As a result, their balance sheet remained in good shape, he said. But as CRR rate was increased at that particular time, banks had to keep their deposited money with the central bank on mandatory basis, he stated. He said that the result had been as it was predicted. According to the analysts, the central bank has to take responsible decisions for getting rid of this situation occurred in the banking sector. Otherwise they are anticipating that the crisis in the banking sector will have a negative impact on the overall economy.

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