The financial sector in Bangladesh is in the grip of a severe liquidity crisis, posing significant challenges to the economy.
The government is now sitting on a double-edged sword as it continues to struggle to secure funds from the banking sector.
It is facing fund shortage for financing development in absence of enough borrowing in one hand while at the same time it is unable to print money which may further aggravate inflation.
Experts said the ongoing dollar sales from reserves, increased investments in treasury bills, cash hoarding outside banks and a surge in non-performing loans had exacerbated the crisis. Bankers are increasingly relying on borrowing from the central bank to maintain operations.
On June 13, the last working day ahead of Eid-ul-Azha, banks borrowed a record amount of Tk 22,406 crore. The trend continued even after Eid, as banks borrowed a total of Tk 15,051 crore on June 27 and Tk 16,484 crore on June 30.
Excess cash in banks dropped to Tk 8,409 crore in April from Tk 19,966 crore in December 2023 and Tk 32,059 crore in December 2021, according to Bangladesh Bank (BB) data.Sources said large sums of money could be hidden by corrupt individuals, contributing to high cash holdings outside banks.
According to BB data, the central bank issued physical notes worth Tk 2,92,186 crore until April 30.
Of the money, Tk 2,64,349 crore or 90.47 per cent were outside banks. Furthermore, persistent inflationary pressures have eroded the purchasing power of the currency, prompting depositors to withdraw their funds to meet rising living costs, bankers said.
Against this backdrop, the central bank has ceased lending to the government by printing money. It compelled the government to repay existing loans to BB by taking new loans from banks, creating further pressure on the banking sector.
Many banks have been unable to maintain adequate Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), highlighting the severity of the crisis. Consequently, private sector credit growth plummeted to 9.9 per cent in April from 11.28 per cent in the same month of 2023.
Ahsan H Mansur, executive director of the Policy Research Institute told that high non-performing loans and capital flight are directly linked to the current liquidity crisis and other challenges faced by the banking sector.
He emphasised curbing corruption, which, according to him, would resolve many of the challenges the banking sector is facing.
Mansur warned the crisis might extend if the government continues to borrow from commercial banks and suggested focusing on obtaining foreign loans to reduce government borrowing from the banking system.
As commercial banks continue struggling with the liquidity crisis, the demand for borrowing might force the central bank to print additional money, he warned.
