Banks should manage liquidity with caution

Senior bankers and experts suggest Bangladesh's banks be cautious in liquidity management from the start of 2018 as a majority of them have been facing a shortage of available liquid funds at the extreme end of this year.

An increasing trend in private sector credit growth, large import payments and declining depositors' confidence on the banking sector may erode banks' liquidity base, they said.

The higher interest rate of government savings tools compared to that of banks' credit products will further hit the banks' liquidity management next year.

Syed Mahbubur Rahman, managing director of Dhaka Bank, said the banking sector might face a liquidity shortage in 2018 as loans disbursed by banks registered a higher growth than deposits in the outgoing year.

The banks may also face a shortage of foreign currency funds because of the need to make a huge amount of import payments, he said.

The latest volatile situation in the banking sector might also put an adverse impact on depositors' confidence which will add extra pressure on banks' efforts to collect the fund from common people, said Rahman, also chairman of the Association of Bankers, Bangladesh.

"The government will try to implement its mega projects next year as 2018 is a pre-election year, which will fuel its borrowing from banks," he said. 

According to data from Bangladesh Bank, the excess liquidity in the banking sector decreased to Tk 90,000 crore in the first week of November from Tk 1.06 lakh crore in the last week of June. It was Tk 1.23 lakh crore in December 2016.

Md Arfan Ali, managing director of Bank Asia, said non-performing loans continued to maintain an upward trend in the last few years, affecting the liquidity base of banks.

A huge amount of funds have been stuck in banks as they have been forced to keep provision against default loans, he said.

"The banks should adopt a cautious policy on the habitual defaulters so that they are not allowed to get credit in the coming year. The banks should put effort into recovering classified loans from the beginning of next year," Ali said.

BB data shows that the amount of default loans increased by Tk 6,159 crore to Tk 80,307 crore in September compared to that a quarter ago.

AB Mirza Azizul Islam, former finance adviser of a caretaker government, said private sector credit growth was continuing its ascent, but the question was where the disbursed loans had gone to.

The higher credit growth in recent months may continue in the coming year which might cause the banking sector to go haywire, he said.

Private sector credit growth in October stood at 18.63 percent, which is way higher than the target of 16.20 percent set for the first half of the fiscal year, shows the BB data.

The central bank should investigate and find where private credit's ultimate destination was in order to tackle classified loans, Islam said.

Mamun-Ur-Rashid, managing director of Standard Bank, said banks should shun aggressive lending to manage their liquidity base properly.

The central bank has recently taken administrative measures against some banks in this regard which will send out a message to other banks, he said.

On December 17, the BB froze Tk 51 crore in ONE Bank's current account with the banking regulator and Tk 25 crore in that of Premier Bank for aggressive lending practices that took them way past the permissible limit for advance-deposit ratio.

The rate of interest on deposit has increased sharply which indicated that the banks are now facing a shortage of available funds, Rashid said.

"Higher interest rate on savings tools continues to encourage the common people to keep their money on the instruments avoiding the bank. Such phenomenon has emerged as a challenge for the banks," he said.

The businesspeople may take a "go-slow" policy to expand their business next year considering that it is the pre-election year, which will hit the banks' profitability, he added.